WEEKLY FED BALANCE SHEET REVIEW. THE LIQUIDITY CONUNDRUM
. Federal Reserve: "Factors Affecting Reserve Balances", July 4
- Fed's Treasuries holdings: $785.5bn (+$8.1bn)
- Other central banks' Treasuries holdings: $1,240.7bn (+$9.0bn) (*)
- Other central banks' agency securities: $741.5bn (-$2.1bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,767.7bn (+$15.1bn)
(*) Off-balance-sheet items.
agustin_mackinlay@yahoo.com
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Another week, another sharp increase in our Global Dollar Liquidity measure. Central banks added more than $15bn to their collective balance sheets, thus contributing to the 15.5% annual rate of growth of funding liquidity — the highest since January 2005. To be sure, the quality of the increase leaves a lot to be desired: the Fed is the biggest contributor (reflecting, perhaps, a seasonal pattern). Note too, foreign CBs' unusual choice of Treasury securities over agency bonds — probably a consequence of higher yields.
Meanwhile, the "liquidity conundrum" is only intensifying, as market liquidity refuses to improve. Our Endogenous Liquidity Index is down 2.5%, reflecting higher credit spreads. In my view, a bullish solution to the conundrum is more likely than not. Inflation expectations continue to moderate, and global economic growth is as strong as ever (*). In the meantime, a trading range scenario should not come as a huge surprise to liquidity watchers.
(*) According to Geraud Charpin, head of European credit strategy at UBS quoted by the Financial Times's Alphaville blog, the sell-off in the CDS market is not being driven by fundamentals: "The sell-off in the market right now is purely technical: macroeconomic numbers have been pretty good and investors expect Q2 corporate earnings to be strong. Essentially, it's all about financial market deleveraging and adjustment rather than macroeconomic fears".
Friday, July 6, 2007
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