Spyglass Macro Advisory _ Weekly 01062021 (002)

What to focus on in Global Macro for the week of January 6th, 2020

Macro Themes on the Radar:
On Friday, the FOMC minutes for December’s meeting were released. While you will have seen lots of
headlines and market commentary on the subject, it can be helpful to go to the source. I have tried
to pick out the highlights.

Rates:    “The expected path of the federal funds rate implied by the medians of survey respondents’
modal forecasts remained essentially flat through 2020. Survey- and market-implied uncertainty
about the near-term outlook for monetary policy declined, with market commentary attributing the
decrease in part to the Committee’s October communications. Survey respondents placed a higher
probability on a reduction in the target range over 2020 than an increase.”

Repo and Reserves:   “Reserve management purchases of Treasury bills continued at a pace of $60 billion per month, with
propositions remaining strong and little discernible effect on market functioning. While these
purchases accumulated, the Desk continued to conduct regular repurchase agreement (repo) operations
in order to maintain reserves at or above the level that prevailed in early September. Repos
outstanding from these Desk operations totaled roughly $215 billion per day, consisting of both
overnight and term operations. The Desk had already conducted three longer-term repo operations
spanning year-end—for a total of $75 billion—and planned to announce an additional longer-term
operation, as well as increase the amount of overnight repo offered around the year-end date.”

“The manager also discussed expectations to gradually transition away from active repo operations
next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo
operations starting in mid-January could reflect a gradual reduction in active repo operations. The
manager indicated that some repos might be needed at least through April, when tax payments will
sharply reduce reserve levels.”

Note that the recent increase in the balance sheet has been achieved using three tools: short-term
repo, longer-term repo and Treasury bill purchases. The level of short-term repo will be reduced in
the coming weeks as the potential year-end liquidity concerns are behind us. How much the balance sheet actually contracts, if at all, will be watched very carefully by the markets. Remember that going forward T-bill purchases will be doing more of the heavy lifting.

Economy

“Overall manufacturing production appeared likely to remain soft in coming months, reflecting
generally weak readings on new orders from national and regional manufacturing surveys, declining
domestic business investment, slow economic growth abroad, and a persistent drag from trade
developments.”

“In addition, softness in business investment and manufacturing production so far this year were
seen as pointing to the possibility of a more substantial slowing in economic growth than the staff
projected …. participants saw trade developments and concerns about the global economic growth
outlook as the main factors contributing to weak business investment and exports.”

“A number of participants observed that the domestic economy was showing resilience in the face of
headwinds from global developments. Moreover, statistical models designed to gauge the probability
of recession using financial market data, including those based on information from the Treasury
yield curve, suggested that the likelihood of a recession occurring over the medium term had fallen
noticeably in recent months.”

(As to the above models – In a world where one could argue that price signals have been warped or
even broken by CB policy, they are relying on those price signals to inform their views. This
increases the likelihood of policy errors going forward.)

Financial Stability

“A few participants raised the concern that keeping interest rates low over a long period might
encourage excessive risk-taking, which could exacerbate imbalances in the financial sector. These
participants offered various perspectives on the relationship between financial stability and
policies that keep interest rates persistently low. They remarked that such policies could be
inconsistent with sustaining maximum employment, could make the next recession more severe than
otherwise, or could strengthen the case for the active use of macroprudential tools to guard
against emerging imbalances.”

To continue click through to the PDF link:     Spyglass Macro Advisory _ Weekly 01062021 (002)

Contact: efill@spyglassmacro.com / SMS, WhatsApp and Voice at +1.203.219.3649

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