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Market Brief – Tuesday 9/17/19

In overnight trading, more evidence of a global economic slowdown came from Singapore as August domestic exports fell -8.9% over this time last year and August electronic exports fell -25.9% from -24.2% in July.

Saudi Aramco said that production will be back to normal in about two-to-three weeks which sent crude oil prices along with oil and gas producing tumbling in early trading.

Despite $1.3 trillion in excess reserve, which are believed to be more than sufficient, the U.S. financial system was short more than $53 billion last night as the Federal Funds Rate was trading higher than the Interest on Excess Reserves (IOER) rate. To alleviate the pressure, the New York Fed authorized an emergency repo auction where banks borrowed $53.15 billion from the Fed.

Repo operations occur when the banking system is short on cash and to fix the problem, the Fed borrows Treasury and agency securities from the banks in exchange for cash. The loans are generally short-term, lasting overnight up to 65 days. The banks do pay interest on the loans. This is another sign of financial stress and an indication that the Fed will cut rates tomorrow at the conclusion of their September FOMC meeting.

The last time the Fed did an emergency repo was back in December 2007. Essentially what happened last night is that the money markets broke. Coincidentally, estimated tax payments were due yesterday which means money was leaving bank accounts to go to Federal and state taxing authorities. When the Fed conducts repo operations it is the last line of defense before things in the financial system break.

Industrial Production rose +0.6% in August and +0.4% on an annualized basis. Manufacturing Production rose +0.5% in August and fell -0.4% on an annualized basis. Both reports validate that the U.S. manufacturing sector is recessing.

Stocks were quiet ahead of tomorrow’s FOMC press release, as expected. Treasury yields initially rose at market open but fell as investors realized that the financial system was surprisingly short on cash last night.

Stocks closed higher thanks to ramp right into market close and Treasury yields were lower on the day. Oil and gas producing stocks were hammered as reports came in that Saudi Aramco will be back at full production in two weeks. Gold was slightly lower, but mining stocks were up. Agricultural commodities traded lower despite new reports of the African Swine Flu arriving in Korea and reports from farmers who are preparing to harvest in a few weeks that their crop conditions are well below expectations.

The New York Fed announced they will conduct a $75 billion repo tomorrow as banks are short funding again. This should be a major red flag as banks should not need overnight funding from the Fed.

Major foreign holders of Treasury securities saw their holdings fall $6 billion in July as Japan is now the largest holder of U.S. debt. From a World Dollar Liquidity perspective, the global economy will continue to slump until the Federal Reserve lowers the Federal Funds Rate to zero percent and resumes Quantitative Easing.

The American Petroleum Institute reported crude oil inventories as Crude: +592k (-2.5mm expected), Cushing: -846k, Gasoline: +1.6mm (-500k expected), and Distillates: +2.0mm (+500k expected). Crude oil traded lower in after-hours trading.