US mkts closed overnight due to the MLK annual public holiday.
Flash back: Back on December 13 the financial world was stunned when, just two weeks after Jerome Powell had said it was "premature" to speculate on rate cuts, the Federal Reserve did a shocking U-turn and pivoted dovishly, ending the Fed's hiking cycle with inflation still running at double the Fed's target of 2%, and said that it had in fact discussed the start of rate cuts, contrary to what Powell said just two weeks earlier.
You see the Fed no longer had a choice and was forced to pursue a dovish pivot because the liquidity in the all-important systemic and interbank plumbing had hit dangerously low levels, resulting in the highest SOFR (Secured Overnight Financing Rate) print on record, and the biggest spike since the last time there was a repo market crisis in March 2020.
(SOFR measures the cost of borrowing cash overnight)
So what does this all mean? Well the Fed is shit scared that the reverse repo facility will be drained and if that happens the SOFR carry rates will explode upwards, which is what happened in SEPT 2019. This forced the Fed to literary buy billions and billions in Treasury Bills to add reserves back into the system to basically avoid a lending collapse.
The reverse repo facility has less than $600bn left and is set to be fully drained some time in March 2024. The Fed’s 2nd FOMC meeting - that’s when they decided what direction interest rates will move just happens to be on 20 MAR 2024.
Bottom line: after several years of tightening, 2024 is when the liquidity floodgate reopens and not only does the Fed start to cut rates aggressively, but with QT tapering, I fully expect the next QE to be launched in the near future (MAR2024), sending the US dollar into its next, and possibly final, reserve currency death spiral as printer goes BRRRR.
Happy Tuesday!
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Andy is the founder of ANDIKA Pty Ltd, a licensed securities & derivatives dealer. He's the author of fiction and non-fiction books and has been a University lecturer on risk and investment.
