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It seems President Trump has nominated himself as the Shadow Fed chair. He also appears to believe the overnight rate should be at 1%. It will be interesting to see how this plays out for the market. Clearly, DOGE wasn’t successful in bringing rates down, and the new tax bill certainly won’t help either. That leaves jawboning as the only remaining option. The issue, however, is that unless the Fed initiates QE or Yield Curve Control, the long end of the yield curve isn’t bothered about what the Fed does with the overnight rate.
If I were Powell, I’d resign at this stage, hand the reins to Trump, and consider relocating to Monaco or a similar destination—simply sit back, enjoy retirement, and watch from afar.
For now, the jawboning appears effective, as rates and the dollar move lower. This shift is also causing the typical correlation between bonds and stocks to break down. It’s fascinating how this relationship evolves: when both stocks and rates rise, it’s attributed to economic strength; when rates decline but stocks rise, it’s seen positively because lower rates help expand valuation multiples. To me, this seems more like a friendship of convenience.
Another interesting factor is the dollar, which is also declining. One has to wonder what the bond market and the dollar are aware of that the stock market isn’t. They appear to be signalling slowing growth. This week’s economic data will be crucial in shaping this theme and determining the next steps. This can be seen quite clearly when examining the US and Japanese 5-year rates, both of which are now back at the neckline. Weak US data this week could easily trigger a breakdown here. If this happens, it will likely disrupt the remainder of the yen carry trade and drag USDJPY below 140.
The S&P 500 has now reached the 50% extension level of wave 3 and has traded above its upper Bollinger Band for three consecutive days, with an RSI of 72. While it’s possible the index could become even more extended, conditions like these typically result in at least a period of sideways consolidation or a pullback.
It may be hard to believe, but the NASDAQ has now traded above its upper Bollinger Band for five consecutive days and has an RSI of 72.6.
You can add Meta to the list of mega-cap stocks that are now overbought, with it too trading above its upper Bollinger band, with an RSI over 70.
Anyway, today we saw the average overnight repo rate rise to 4.57% for quarter-end—the highest since December. This rate should begin to ease tomorrow, although I’d guess SOFR will likely come in above 4.5%. Meanwhile, reverse repo volumes spiked by around $175 billion today, reaching $461 billion. Still, at least for now, the stock market has remained largely unaffected.
Even the Standing Repo Facility saw $11 billion pass through it today, as the overnight rate traded above 4.5%. As shown in the chart below, we haven’t observed this level of activity in the SRF for quite some time, highlighting just how tight conditions were in overnight markets today. The Fed was a liquidity provider in this case.
It seems remarkable to me that this kind of liquidity tightening occurred without even causing a ripple on the surface. However, as I’ve mentioned numerous times before, liquidity impacts often involve a delayed reaction.
-Mike
Terms by ChatGPT
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Repo rate (Repurchase Agreement Rate):
The interest rate charged in the repurchase agreement market, where financial institutions borrow and lend short-term cash against collateral, typically government securities.
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Quarter-end:
The final days of a financial quarter when financial institutions commonly adjust their balance sheets, impacting liquidity and interest rates.
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SOFR (Secured Overnight Financing Rate):
A benchmark interest rate based on overnight borrowing costs secured by U.S. Treasury securities. SOFR is used as a reference rate for various financial products.
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Reverse repo (Reverse Repurchase Agreement):
A transaction where institutions lend cash to the Federal Reserve in exchange for securities collateral, temporarily reducing liquidity in the financial system.
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Liquidity tightening:
A situation where there is reduced availability of funds within financial markets, often leading to higher short-term interest rates.
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Standing Repo Facility (SRF):
A Federal Reserve tool designed to help control short-term interest rates by providing liquidity directly to institutions when market conditions become strained.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Subscribe to receive this FREE daily commentary directly in your email
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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