Market Brief – Wednesday 9/18/19

In overnight trading, Japan imports were down -12.0% on a year-over-year basis and exports were down -8.2% on a year-over-year basis, adding further evidence that the global slowdown is not stopping.

The Fed opened their overnight repo operations to the tune of $75 billion to loan any primary dealer dollars for one day by posting collateral. There were $80.05 billion in bids made, leaving one or more banks short $5 billion in liquidity. While it is unknown who needs this liquidity, as it could be going offshore, it is strong evidence that there is a high demand for dollars in the global financial system.

Each night banks who are part of the Federal Reserve system must meet their reserve requirements and when they can’t, they borrow from another member bank. When none of the other member banks have the cash to lend, the Fed steps in to provide liquidity. What nobody knows is if this is a temporary need or the beginning of a structural problem, but what we do know is the world is short U.S. Dollars.

The housing market finally reacted to lower interest rates as Housing Starts jumped +12.3% in August and Building Permits rose +7.7% in August. While most of the increase was due to multi-family, or rental units, the question is if this is demand-led or supply led.

The Department of Energy reported crude oil inventories as Crude: +1.06mm (-2.5mm expected), Cushing: -647k, Gasoline: +781k (-500k expected), and Distillates: +437k (+500k expected). Crude oil traded lower after the report.

Stocks opened down slightly on the back of FedEx which posted weaker than expected earnings and less-than-optimistic forward guidance. Treasury yields fell as investors are growing concerned about the Fed’s recent repo operations. Investors worldwide will be watching today’s FOMC press release for an expected -0.25% rate cut and an explanation for the repo operations.

The Federal Open Market Committee led by Chair Jerome Powell met market expectations with a -0.25% cut to the Federal Funds Rate. Based on their current projections, the committee doesn’t expect any further cuts in 2019.

The Fed sees moderate economic growth through next year and while Powell avoided the question, the Fed is standing by their view that this is a mid-cycle adjustment. Powell brushed off the recent repo operations as a demand for cash due to the third-quarter estimated tax payments, even though this date was known well ahead of time.

Powell carefully blamed the global economic slowdown on the trade wars but remained optimistic that it will be resolved soon. Even with a small cut, World Dollar Liquidity is still contracting which will continue to slow the global economy until the Fed resumes easing.

Initially, stocks had a negative reaction to the FOMC announcement but quickly put the negative news aside as investors rushed in to buy stocks. Treasury yields closed lower on the day but should head lower due to the Fed easing. In the short-term, investors may drive yields higher, but as long as the Fed is easing, rates will fall.