Concerns about declining bank reserves unfounded

CONCERNS ABOUT DECLINING BANK RESERVES UNFOUNDED (1349 EST/1849 GMT)

Concerns about declining reserves in the U.S. banking system leading to a possible repeat of 2019’s repo market blowup are unfounded, according to Credit Suisse’s Zoltan Pozsar, noting that he is “stunned” by questions on the issue.

Total bank reserves have dropped to $3.06 trillion from a peak of $4.19 trillion in September 2021, according to Federal Reserve data, as the U.S. central bank cuts bond purchases in an effort to normalize monetary policy.

“The market’s search for the level of reserves at which the system “breaks” implies that the market is worried about a repeat of the 2019 repo blowup,” Pozsar said in a report sent on Monday. But “such fears are misplaced.”

The cost to borrow in the overnight repurchase agreement market (repo) spiked in 2019 as bank reserves fell too low, which was blamed on the Fed’s quantitative tightening going too far.

But there are major differences between then and now, Pozsar said. There were no balances in the overnight reverse repo facility during the first round of QT.

Demand for repo funding was also “immense.” By contrast, “demand for repo funding is weak today.”

And, “demand for dollar funding in the FX swap market is weak too, as FX-hedged buyers of Treasuries are now scaling back their positions and economic uncertainty and higher nominal rates are driving a wave of deleveraging,” Pozsar said.

Meanwhile there is $2 trillion parked daily with the Fed’s overnight reverse repo facility, which represents “cash the system does not need.” This and the Fed’s standing repo facility, which was created in 2021, are two pools of liquidity that could be tapped if needed.

(Karen Brettell)

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WHAT'S TO LEARN FROM THE VOLATILITY IN 2022 (1210 EST/1710 GMT)

U.S. stocks stumbled on Monday to the tune of a 1.8% drop for the S&P 500 SPX, marking the 21st time the benchmark index has seen a move of 1% or greater in either direction this quarter, according to Jessica Rabe, co-founder of DataTrek Research in New York.

Since 1958, the S&P has averaged 13 "one percent" days in any one quarter of the year, with a standard deviation of that mean at 10 days.

That means the S&P is already nearly 1 standard deviation above the quarterly average for "one percent" days with 18 trading days to go this quarter. On Tuesday, the S&P had already fallen as much as 1.3% before midday.

Rabe notes that Q4 of this year is also part of a run of quarters that are unusual in terms of "one percent" days, with the prior three quarters seeing at least 30 such daily moves, with the only two previous occurrences happening from Q3 2002 through Q1 2003 and the four consecutive quarters between Q3 2008 through Q2 2009.

Calculating the returns in the two prior instances after the index hit its peak number of "one percent" days, Rabe found that U.S. stocks still saw above average volatility after the index bottomed, but it lessened quickly as stocks rallied.

In addition, when the S&P 500 sees three of four consecutive quarters with an elevated amount of "one percent" days, the bottom only occurs when investor uncertainty about fiscal or monetary policy or geopolitical concerns abate, said Rabe.

(Chuck Mikolajczak)

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MINDING THE GAP: DAMPENING DEMAND, DOLLAR STRENGTH PUSH TRADE DEFICIT WIDER (1111 EST/1611 GMT)

It would appear that inflation is the one thing every nation has in abundance, along with central banks willing to slip the garrote of tightening monetary policy around the throat of global demand.

The difference between the value of goods and services imported to the United States and that of domestic goods and services sold abroad (USTBAL=ECI) grew to $78.2 billion in October, according to the Commerce Department.

Even so, the trade gap was narrower than the $80.0 billion deficit analysts expected.

A strong dollar and softening global demand weighed on exports, which dropped 0.7%. Imports grew by 0.6%.

"The pattern may be set for the near-term trade outlook, with waning global demand for US goods weighing more heavily on exports relative to improved imports, which continue to be supported by a strong dollar and resilient consumer spending," writes Matthew Martin, U.S. economist at Oxford Economics.

Line-by-line, shipments of American-made goods plunged 2.1% to its lowest level since March, offsetting services exports, which surged to a record high $80.6 billion, mostly on the strength of travel and transportation.

Exports of capital goods set a record high, and soybeans helped boost food shipments.

The closely-watched goods trade balance with China narrowed to $28.9 billion.

The widening gap doesn't exactly bode well for fourth-quarter GDP. The post-pandemic demand boom has resulting in net trade contributing to headline number in the last two quarters, after dragging on the total figure for seven straight quarters previous.

"After contributing positively in Q3, trade will likely pose a modest drag to GDP growth for the remainder of the year," Martin adds.

Wall Street's lachrymose mood was extending Monday's sell-off, with every major S&P sector showing red.

Market leading megacap growth stocks were largely responsible for the carnage.

(Stephen Culp)

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STOCKS STAY RED, FED RATE HIKES A CONCERN (0949 EST/1449 GMT)

Stocks opened in the red on Tuesday as investors worried that solid economic data could lead the Federal Reserve to hike rates higher and for longer, and ultimately cause a deeper recession.

All three major indexes closed at their lowest levels in nearly a week on Monday after upbeat services sector data offered more evidence of strength in the U.S. economy despite a series of big interest rate hikes.

Investors are waiting on highly anticipated consumer price inflation data due next week, which will be followed by the Fed's interest rate decision. The U.S. central bank is expected to hike rates by another 50 basis points when it concludes its two-day meeting on Dec. 14. (FEDWATCH)

The Nasdaq Composite IXIC is the weakest performer of the major U.S. indexes, falling 0.6%, while the S&P 500 SPX fell 0.3% and the Dow Jones Industrial Average DJI dipped 0.1%.

Of the major S&P 500 subsectors, communications services S5TELS led losses, while utilities S5UTIL, materials S5MATR and consumer staples S5CONS posted minor gains.

Here is where markets stand in early trading: