Doug Noland writes
This week’s disappointing ISM reports dominated business headlines: “US Manufacturing Survey Shows Worst Reading in a Decade.” “U.S. Factory Gauge Hits 10-Year Low as World Slowdown Widens.” “U.S. Manufacturers Experience Worst Month Since 2007-2009 Great Recession.” “ISM Services Index Hits Three-Year Low, Missing All Estimates.” “Services Survey Shows Economy is Weaker Than Expected Amid Slowdown Fears.”
A Google news search for recent “money supply” articles yields slim pickings: Apparently, China’s Xinhua news agency is now the go-to source for U.S. money supply insight: “U.S. Fed’s M2 Money Stock Rises as Market Bets Another Rate Cut.” Other top results included, “Egypt’s M2 Money Supply Rises 11.78% Year-On-Year in August,” and “Serbia’s M3 Money Supply Grows 12.3% y/y in August.”
Not that many years ago economists and market analysts followed weekly money supply data with keen interest. Rapid monetary expansion was, after all, indicative of excessive Credit growth and attendant inflationary pressures. Slowing money growth would indicate a tightening of lending conditions or waning demand for Credit. The Federal Reserve and global central bankers duly monitored the monetary aggregates as an indication of the appropriateness of monetary policies. Indeed, money and Credit had been a prime focus since the establishment of central banks. Throughout its history, the Federal Reserve was expected to prudently manage the “money” supply to ensure stable prices.
Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.
Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.
M2 “money” supply surged $70.2 billion last week, the strongest advance since the week of January 11, 2016. Notable to be sure, but apparently not worthy of a headline or article. Moreover, M2 was up $262 billion in 10-weeks and $575 billion over 22 weeks. The Fed’s weekly H.6 “Money Stock and Debt Measures” report presented a 13-week seasonally-adjusted M2 growth rate of 8.5%.
Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.
Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.
The Fed some years back discontinued tabulating a broader “M3” aggregate. It does, however, report Institutional Money Fund deposits, previously a key component of M3. It’s certainly worth highlighting that Institutional Money Funds expanded $256 billion over the past 22 weeks, a 32% annualized growth rate. Combining M2 and Institutional Money Funds, growth in this aggregate reached $831 billion over the past 22 weeks (to $17.666 TN), a blistering 11.9% annualized growth rate.
In last week’s analysis of the Fed’s Q2 Z.1 report, I noted the strong pickup in Bank lending (Q2 6.8% annualized) along with the notable $710 billion nine-month surge in the “repo” market (Federal Funds and Securities Repurchase Agreements). It’s no coincidence that these developments corresponded with rapid growth in both commercial bank savings deposits and institutional money fund assets, along with the collapse in Treasury and corporate bond yields (surge in prices).
September 30 – Financial Times (Joe Rennison): “Companies around the world sold a record amount of bonds last month, taking advantage of low borrowing costs fueled by investors’ frenzied search for yield. September tends to be a busy period for the bond market… That trend was amplified this year by a global rally in government bonds in August which lowered interest costs for a host of companies looking to sell debt. A total of $434bn of corporate bonds were sold globally in September, according to… Dealogic. That sum… was about $5bn higher than the previous high of March 2017. ‘It’s very attractive for issuers coming into the market right now,’ said Monica Erickson, a portfolio manager at… DoubleLine.”
October 1 – Bloomberg (Finbarr Flynn and Hannah Benjamin): “Companies globally sold a record amount of bonds in September as investors hungry for yield poured into debt, betting that major central banks can keep the global economy out of a recession… September’s new U.S. investment-grade debt supply reached $158 billion, making it the third-largest month ever for issuance. It was a month for the record books: an unprecedented 130 issuers tapped debt capital markets after a frenzied start that made the first week the busiest market participants had seen in their careers.”
September 30 – The Bond Buyer (Aaron Weitzman): “Municipal bond volume continues to accelerate, closing out the month of September 39.1% higher and the quarter 17.8% higher than a year earlier, as issuers flocked to market with taxable deals. September volume rose to $35.38 billion of municipal bonds sold in 894 transactions…”
I have posited that a bond market “melt-up” was instrumental in what has been a period of extraordinary Monetary Disorder. A weakening global economic backdrop along with escalating trade war risks and fragile markets spurred a dovish U-turn by the Fed, ECB and global central banks generally. The global yield collapse was largely fueled by a combination of speculative excess and risk market hedging. Such strategies have focused on safe haven sovereign and investment-grade corporate debt as instruments that would see inflating prices in the event of a “risk off” backdrop and resulting central bank rates cuts and QE.
The surge in speculative leverage – exemplified by enormous “repo” market expansion – created a self-reinforcing surge in marketplace liquidity, of which a portion flowed into the “money” supply aggregates (notably through the expansion of commercial bank saving deposits and institutional money fund assets). Moreover, it’s my view that the abrupt September reversal of market yields and the prospect of end-of-quarter liquidity challenges spurred a reversal of some levered holdings that quickly manifested into a liquidity shortage and spike in overnight funding costs.
Federal Reserve Credit jumped $83.9 billion last week to $3.893 TN, the strongest weekly Fed balance sheet expansion since March 2009. This pushed four-week Federal Reserve liquidity operations to $170.5 billion – taking Fed Credit to the highest level since the week of April 17th.
I’ll assume at least some of this expansion will be reversed as quarter-end positioning normalizes in the marketplace (leverage reversed for reporting purposes is reestablished). Yet I view the eruption of acute repo market instability as an urgent signal of mounting financial market instability. The Fed seemingly agrees.
October 4 – Financial Times (Joe Rennison, Colby Smith and Brendan Greeley): “The Federal Reserve Bank of New York will extend its intervention in the repo market into November…, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September. The New York Fed first stepped into the repo market… after the cost of borrowing money overnight quadrupled to 10% last month. It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter… The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November. The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.”
U.S. equities reversed higher on Friday’s “Goldilocks” jobs report. But the rally gained momentum on the New York Fed’s “repo” extension announcement. Late Friday afternoon, Cleveland Fed President Loretta Mester reiterated a comment made by her colleagues: “The Fed’s decision on reserve supplies isn’t about QE.” The problem is that Fed liquidity operations, and the resulting expansion in Fed Credit, is very much about backstopping the markets. Markets are not bothered by a “QE” or “overnight repo operation” label. Rather, the Fed’s aggressive measures further crystallize the market view the Fed (and global central bankers) has little tolerance for fledgling market instability. For good reason, markets expect central banks to respond with overwhelming force to any issue that risks unleashing latent Crisis Dynamics.
At 3.5%, the U.S. unemployment rate in September hit a 50-year low. Money supply is booming. It was the third-largest month ever for investment-grade debt issuance. The St. Louis Fed’s weekly forecast for Q3 GDP growth is up to 3.12%, which would be the strongest reading since Q3 ’18. With the tailwind of low mortgage rates, housing markets are gaining momentum. New Home Sales are running at the strongest pace since 2007. August Existing Home Sales were reported at the strongest pace since March 2018. Recent mortgage purchase applications have been running about 10% above the year ago level. And at a 17.19 million annualized pace, auto sales held up solidly in September. The consumer is working, earning, borrowing and spending.
This week’s ISMs – manufacturing and non-manufacturing – both significantly missed estimates. Manufacturing is undoubtedly weak, with attention focused on the much larger non-manufacturing sector for indications of a broadening slowdown. At 52.6, the ISM Non-Manufacturing index is still expanding.
The implied yield on January Fed funds futures declined 10.5 bps this week to 1.47%, boosting the two-week drop to 16 bps. This implies market expectations for 36 bps of additional rate cuts by January. Markets are now pricing in a 73% probability of a rate cut at the Fed’s October 30th meeting (down from Thursday’s 85%). Two-year Treasury yields sank 23 bps this week to 1.41%. European bank stocks were slammed 4.7% this week. Bank stocks were down 3.0% in the U.S. and 2.7% in Japan.
I would tend to somewhat downplay current U.S. economic weakness. These are clearly abnormal times, but it would be atypical for such loose financial conditions not to support economic activity (for now). Global markets are a different story. Myriad co-dependent Bubbles appear more vulnerable by the week – while monetary stimulus and prospects for additional QE only exacerbate excesses along with fragilities. Trade negotiations remain a major wildcard. Increasingly, impeachment proceedings and rancid Washington pandemonium add a layer of complexity upon a highly complex backdrop. Taking it one week at a time, there’s palpable pressure on the administration to make some headway with the Chinese.
http://creditbubblebulletin.blogspot.com/2019/10/weekly-commentary-resurrecting-m2.html