The Fed blinked – 2021wk12

by K P
Reading Time: 9 minutes

This Week:

  • Opinion piece
    • The Fed blinked, FOMC recap
    • CV19 lockdown fear-o-meter highlight
    • Philly Fed
    • US Permits & Housing starts
    • ZEW
    • Turkey CBRT blunder
    • chartstorm: Rates/Bonds/FX/Commodities/Stock Indices
    • Global Cross Asset performance tables
  • “…one more thing” : happy anniversary
* this is not a trade recommendation and for educational purpose only. please do your own research.

Opinion Piece

The Fed blinked.

They left the official target range of course unchanged at 0.00-0.25, they also didn’t touch the $120bln monthly UST and MBS securities purchase program, they didn’t “technical hike” the IOER, but they did change a few things

a) NY Fed raised its RRP facility (Reverse Repo Program) limit by $50bln to $80bln per counterparty “to reflect the growth and evolution of US$ funding markets”. Or in other words “we need a bigger boat now”, there is too much liquidity which needs to be parked somewhere, via banks or e.g. Money Market Funds.

b) By Dec 2022 3 more votes want a hike (previously 1), and by Dec 2023 even 7 voters see a hike (previously 5). Translating this “dot-plot” into rates, the Fed just went from weighted 0.257bp to 0.403bp or +15bp. A tiny soft hike in the near future. (translated: the market is telling them loud and clear)

c) They will let the temporary change to SLR (Supplementary Leverage Ratio) expire 31 Mar

While the market often is too aggressive in pricing cuts or hikes, this time the STIR and Bond markets really pricing in a stronger recovery and inflationary outlook then even the optimistic Fed outlook (see table below). Fed projects unemployment rate dropping below 4% by 2022, GDP +3.3%. AND STILL THINK FF 0.10% is appropriate ? haha

It takes more time to help part of the economy which was so destroyed by the lockdown, fiscal help just came with another giant $1.9TRILLION package, the third now since CV19 crash. So why would the Fed now taper ? Surely not.

One of <the> key concerns are the PUA/PEUC jobless claims. While the regular state number and initial claims softened, there are still a total of 18mln claiming, of which 12.4mln are from PUA/PEUC. That number is just hovering between 12-14mln since May last year ! See dashboard chart. Once those claims drop to 4mln, Fed will be start a more hawkish narrative. my2c

But, they surely don’t have a blindfold on either, raw materials are absolutely screaming higher, every regional and national manufacturing survey is soaring, and naturally for this reason, STIR market is much more hawkish into 2023, let alone from the bond market 5-10y maturities. Yields are ripping in a speed the Fed just play cool now, but behind doors, they not only blink, they most likely REM while they sleep.

I predict during the course of 2021 – as the global and domestic economies reboot – they will either announce first real hint of tapering or YCC yield curve control.

Fed is behind the curve now.

Regarding the SLR announcement, this temporary solution could be easily re-introduced if the proverbial “sh** hits the fan”. But as the SLR expires, this could mean banks may have to raise capital (stocks or Tier1 bonds), which could give some pressure on selected bank shares (and the KBE or XLF ETF). For more details of possible impacts on the repo, swap spreads I would recommend to read comments from FOMC rate guru Slotan (CS).

Here the link for Fed’s “Summary of Economic Projections” ICYMI 

Remember, you have to take STIR projections with a grain or two of salt. I “amended” this JPM glorious chart to show “where the wind blows” (joking) has a higher probability… There is a difference between “market is pricing cuts / hikes” and what a central bank (here the Fed) actually does. πŸ™‚


CV19 lockdown-fear-o-meter

Here is a filtered version from the global view (see dashboard), and knowing how politicians on either side of the aisle have acted and will do…

This week France and Poland just increased lockdown measures, Paris shut, Hamburg Germany to return to full lockdown. Norway is shut again, Hungary tightened, Philippines says wider lockdown possible…


  • Business Surveys
    • NY Empire 17.4 e14.5 (12.1)
    • Philly Fed optimism diffusion index just “exploded” 
      • Manufacturing Index 51.8 e23 (23.1)
      • Business Conditions 61.6 (39.5)
      • New Orders 50.9 (23.4)
      • Prices Paid 75.9 (54.4)
      • Employment 30.1 (25.3)
  • New Home Building starts cooling down
    •  Two of the major factors, mortgage rates and raw materials e.g. lumber taking a toll on new permits applications and housing starts. Benchmark US treasuries 30Y are now more than 1% higher vs a year ago and MBA rates started to rise too, currently 3.27%. Lumber has gotten very expensive, +50% since January lows. 
    • Permits 1.682mln +15% Y/Y e1.750mln (1.886mln)
    • Housing starts 1.421mln -9.3% Y/Y e1.560mln (1.584mln)


  • CPI
    • France +0.6 (+0.6)
    • Italy +0.6 (+0.4)
    • EU +0.9 (+0.9)
  • ZEW
    • Latest financial analysts survey showed yet again an optimistic outlook, current conditions are still bleak but improving, still a huge gap between reality and hope (spread +137.6 points!)
    • Germany Current -61.0 e-62.0 (-67.2)
    • Germany Sentiment +76.6 e+740 (+71.2)
    • Euro Area Sentiment +74.0 (+69.6)

Central Bank Action

  • DM
    • US FED unch 0.00-0.25%
    • Bank of England unch 0.1%
    • Norway unch 0%
  • EM
    • Turkey +200bp to 19% 4th hike ! President Erdogan immediately sacked the CBRT governor Naci Ağbal who in fact took over this role only last November and was now replaced with an “advocate of lowering rates”. +875bp in 3months to eye-watering 19% ! Now THIS is old school High Yield ! 
    • Brazil +75bp to 2.75% 1st hike, expectations were +50bp
    • Russia +25bp to 4.5% 1st hike after recent CPI run to +5.8% and holds “open the prospect of further increase”
    • Indonesia unch 3.5%
    • Taiwan unch 1.125%


RiskOFF Week

  • RATES: bear-steepening continued
  • CREDIT: wider spreads
  • FX: TRY soared after 2% hike; NOK, RUB dropped on oil weakness
  • COMDTY: Palladium soared after mining flooding, output cut, Energies sold off further with re-opening Texas facilities
  • STOCKS: overall soft tone
  • SECTORS: Silver & Goldminers are back , Energy sector tanked


  • Fed starts to blink, 2024 STIR futures softened further by up to 9bp, 2025 by 13bp
  • US cash curve moved higher too again, 5Y +4bp, 10s +9bp, 30s +6bp, curve steepened
  • Short term picture for the long end looks exhausted, technically a retracement could start any day, but bonds sometimes behave differently, once they start a new trend, that could run longer than in other asset classes


  • CDS Indices on iTraxx and CDX closed wider (see dashboard)
  • Investment Grade Corp credit LQD ETF has now suffered -7% drop since December while Junk or High Yield Corp Bonds JNK or HYG ETF “only” sold off -2.4%. We explained the reasons in a blog the other week, duration and crude oil are the most driving factors here


  • TRY Turkish Lira gained across the board, +5.2% vs EUR and GBP, +4.8% vs USD after CBRT hiked the key interest rates for the 4th time, another +200bp to eye-watering 19%. Governor was immediately sacked by president Erdogan
  • BRL Brazil Real gained after BCB Banco Central do Brasil hiked first time +75bp. 
  • weakest performance last week from NOK: -1.3% vs USD not so much that Norges Bank left rates unchanged, but Brent sold off
  • RUB Russian Ruble weakened throughout the week due to Brent and Natgas weakness, central banks 1st hike +25bp came on Friday
  • Overall most pairs experienced a “single round trip” with initially gaining some grounds after FOMC announcement, only to return to base within a few hours


  • Palladium soared +16% (intraweek high) to close +11% after Russian miner Norilsk Nickel had to cut output forecast for 2021 after a flooding accident
  • Marathon Petroleum Corp $MPC restarted a reformer at Galveston Bay refinery in Texas, this is the second reformer to restart since the refinery was shut on Feb15th by the effects of severe Texas freeze 
  • NatGas another -2.7% weaker. Recent Texas freeze spike until this week Friday intraday low NG nearly tanked -20%, recovered slightly into Friday close
  • Brent fell -11% from Monday intraday high to Friday intraday low to close -7% on the week
  • RBOB fell -12% from Monday peak to Friday low to close -9% on the week
  • Gold slightly better bid and continues the rebound we mentioned last week’s blog


RiskOFF Week

  • Currently all eyes are on the US bond market, on top FOMC week, therefore all the reflation and rotation themes. The major global benchmark S&P500 and Nasdaq closed a touch softer.
  • “What do trading markets and comedy punch lines have in common ? – TIMING !” … nothing encapsulates this better than recent Reflation Relative Value Themes like XOP/SPY or COPX/GDX, where anticipating the theme, riding the trend, watching the momentum and monitoring the exhaustion and stepping back from greed:
    • Given this week’s Crude oil, RBOB, Heating Oil and NatGas weakness, all energy related stock market ETFs sold off heavily. XOP -7%, XLE -7.5%, XES -11%. 
    • Silver and Gold miners SLVP and GDX ETFs outperformed, closing +2.6 +2.4% resp. The mini comeback of Gold combined with profit taking in Copper miners led to a -13% drop so far in the COPX/GDX pair
  • Asia EM: EEM ETF, the “Emerging Market Nasdaq” given its composition, underperformed the global ACWI ETF by about 6% since mid Feb. Outright, a few areas start to feel the stronger US$ and higher US rates and <maybe> setting up possible H&S correction patterns, e.g. Taiwan, HongKong, EEM ETF 

weekly performance snapshot wk12

monthly performance snapshot wk12

outright Momentum/Trend/Exhaustion snapshot wk12

spread/ratio Momentum/Trend/Exhaustion snapshot wk12

…One More Thing…

geez, time flies, one year anniversary… I bookmarked my tweet from March 3rd, before the shitstorm started to go into full gear, and I kept the FT from March 19th, before some morons plundered toilet rolls in the super market. epic moments.

*  if you would ignore my grammar and focus on reading between the lines and connect some dots, you are awesome ! 

Das war’s , vielen Dank und good luck, Kai


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