SOXQ - QE Has Restarted
2023-03-21 10:32:00 ET
Summary
- With about $500 billion in outflows from the smaller banks, if one were to estimate the total value of all emergency facilities from the Fed and other agencies – even though that number is changing by the day – one can say that the Fed tightening cycle is now over.
- Right now, the Fed balance sheet is going up with the same speed as if we are in late March 2020.
- The present Fed fund rate is 4.75%, before whatever the Fed does on Wednesday this week.
With about $500 billion in outflows from the smaller banks, if one were to estimate the total value of all emergency facilities from the Fed and other agencies – even though that number is changing by the day – one can say that the Fed tightening cycle is now over. I don’t know if Powell will hike by 25 bps on Wednesday, but I do know that he shouldn’t. The Fed’s balance sheet grew by $300 billion in a week and when the new weekly data comes out on the day of the FOMC press conference, it will probably have grown some more. To remind readers, the monthly rate of COVID QE after the initial surge was $120 billion. Right now, the Fed balance sheet is going up with the same speed as if we are in late March 2020.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The 2-year note, the most sensitive to Fed policy, dropped like a rock from 5.09% in the week of the SVB ( SIVB ) failure to 3.86% at the end of last week. Basically, the bond market is telling Mr. Powell to cut rates.
With a growing balance sheet, if he were to hike even by 25 bps, it would be like driving a car by hitting the gas pedal and the brake pedal at the same time. I know he felt compelled to hike, but cutting rates or pausing is what the bond market is telling him to do. His “higher for longer” narrative no longer applies.
I don’t think the Fed’s balance sheet will keep growing as a matter of policy, but I think it will grow some more as a matter of necessity, until this banking crisis is resolved.
Powell shares some of the blame for this crisis, as he overstimulated the financial system and then hiked rates too quickly, as he was behind the curve on inflation. Rapid interest rate hikes in an economy addicted to low interest rates can bring on precisely the type of problem we have now.
He is making way too many mistakes for a central banker – a long list I elaborated last week.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
At the start of the COVID crisis, he cut the Fed funds rate by 1.5% in March of 2020. I don’t think he needs to do anything like that now, but flat out pausing seems to be the best course of action. Fed futures are already pricing in declines in the Fed funds rate by the end of the year, by close to 1%. The December 2023 Fed funds futures closed on Friday at 96.1250. One minus that price gives the expected Fed fund rate which is 3.875%. The June 2024 Fed fund futures closed at 96.6050, implying a Fed fund rate of 3.395%.
The present Fed fund rate is 4.75%, before whatever the Fed does on Wednesday this week.
The market is telling Powell to cut rates on Wednesday, but will he? We don’t have long to wait.
Out of Financials and into Tech
Typically, the tech sector does not go straight up while the financial sector goes straight down, despite any one-day moves, but this is precisely what has been happening since the failure of Silicon Valley Bank. (There is no credit or counterparty risk in the technology sector.)
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This type of divergence is not sustainable. This banking crisis needs to be over for the stock market to be on a firmer footing. Clearly, though, investors believe that the technology sector is a safer place to be than the financial sector, at least on a relative basis.
Navellier & Associates Inc. does not own Silicon Valley Bank ((SVB)), in managed accounts. Ivan Martchev does not personally own Silicon Valley Bank ((SVB)) .
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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QE Has Restarted