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“Earthquakes”, “Golden Paths”, & “Everything’s Booming”: FedSpeak Sparks Bond, Bitcoin, & Big-Tech Gains

"Earthquakes", "Golden Paths", & "Everything’s Booming": FedSpeak Sparks Bond, Bitcoin, & Big-Tech Gains

Another quiet macro day was…



"Earthquakes", "Golden Paths", & "Everything's Booming": FedSpeak Sparks Bond, Bitcoin, & Big-Tech Gains

Another quiet macro day was relatively catalyst-free - even with an armada of Fed Speakers - since all pretty much sang from the hymn-sheet - data-dependent, job not done, inflation still too high, rates high(er) for long(er), no cuts on the agenda:

  • Kashkari (uber hawkish): “I’m not see a lot of evidence that the economy is weakening,” reminding markets that there hasn’t been any discussions about interest-rate cuts at the FOMC.

  • Goolsbee (hawkish dreamer): The Fed can continue down what he calls the “golden path” to a soft landing. “We’ve got to get inflation down - that’s the No. 1 thing..."

  • Barr (hawkish, anti-crypto): “It is really critical that we continue to do the work necessary to make sure we get inflation down to 2%.” Fed has "strong interest" in regulating stablecoins, "still weighing the prospect" of CBDC.

  • Schmid (no comment on monetary policy): "The transition from fossil fuels to renewables is both reliant upon and an influencer of supply chains and capital allocation."

  • Waller (hawkish/neutral): Labor supply "clearly calming down", normalizing to pre-pandemic levels. "Everything was booming" in Q3. 10Y yield 'tightening' has been a monetary policy "earthquake." Prices probably won't go back to pre-pandemic levels, if rate-hikes "cause instability, Fed has other tools."

  • Logan (hawkish): "I have seen some important cooling in the labor market... inflation readings look like they are trending towards 3%, not 2%... " Critical that Fed "stay true to" 2% inflation target, "must stay focused on curbing inflation in a timely way."

  • Bowman (uber hawkish): “I continue to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way.”

At around 1215ET, the FHFA said that FHLBs wil face new rules to curtail loans to struggling banks. Regional banks will be 'proper fucked' by this as, for now, this has been a workaround for them to manage the holes in their balance sheets.

The NYFed confirmed that the recent "strength" of the consumer was shown to be based on credit-card spending... and delinquencies are on the rise.

But none of that mattered to big-tech buyers as Nasdaq rallied from the cash open once again. The Dow and S&P managed modest gains while Small Caps ended red...

As UBS notes, US equities are squeezy below the surface in tech with profitless tech up 2.6% (some earnings driven) among the best performers on Tuesday, but not the broad squeeze/unwind seen across sectors last Thursday and Friday.  The difference now vs last week is that mega caps are acting defensive and hence there is a much broader tech rally on Tuesday.

Source: Bloomberg

8 straight day higher for Nasdaq and 7 straight for S&P - the longest winning streaks since Nov 2021...

Small Caps are down for the second day, pushing the Russell 2000 to its widest gap to Nasdaq... ever

Source: Bloomberg

Small caps’ underperformance suggests some underlying jitters about an economic downturn, inflation and the impact of continued Fed hikes. These companies have more limited revenue streams than mega caps and are less able to pass through higher costs. They’re also more sensitive to slowing growth and changes in borrowing costs.

Value underperformed Growth once again, testing down to recent lows...

Source: Bloomberg

The Nasdaq Composite topped its 100DMA but the late day selloff tested back down to that level...

For the second day in a row, cyclical stocks failed to sustain a bid (defensives outperformed) as investors continue to envisage an eventual slowing in the economic growth momentum...

Source: Bloomberg

VIX was smashed to a 14 handle as gamma went increasingly positive...

Treasuries were bid across the curve with the long-end outperforming (30Y -7bps, 2Y -2bps)...

Source: Bloomberg

10Y yields ran up to pre-payrolls levels, hit all the stops, and have dropped since...

Source: Bloomberg

The dollar followed the same path - rallying up to pre-payrolls levels and reversing on the stops...

Source: Bloomberg

Bitcoin surged higher around 1215ET, back above $35,500...

Source: Bloomberg

Gold drifted lower again today...

Oil was down hard today (ahead of tonight's API data), well below the pre-Israel levels...

...and breaking below the 200DMA to its lowest since July...

Source: Bloomberg

Finally, the world’s central banks keep draining the flood of pandemic-era liquidity from financial markets. “Central banks’ balance-sheet reduction will further deplete excess liquidity in the US, UK and Euro Area but the timing, speed and effects will vary,” strategists including Oliver Levingston wrote in a note to clients Tuesday.

Source: Bloomberg

Is the market betting on future balance-sheet expansion? Or do we need to see the convergence of stocks and liquidity before the world's central banks unleash their balance sheets once more?

Tyler Durden Tue, 11/07/2023 - 16:00

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Regional Bank Reckoning Looms As Regulators Call For FHLB Limits

Regional Bank Reckoning Looms As Regulators Call For FHLB Limits

Is Bill Gross about to face another big loser? On Nov 2nd, the former ‘bond…



Regional Bank Reckoning Looms As Regulators Call For FHLB Limits

Is Bill Gross about to face another big loser? On Nov 2nd, the former 'bond king' wrote on X that "regional bank falling knife has hit bottom" adding that he was buying shares of Truist Financial, Citizens Financial Group, KeyCorp, and First Horizon.

The Regional Bank Index soared for two days after that, but the last two days have seen the index give some of those gains back...

And today, we get headlines that - on their face - would seem like very bad news for smaller banks as regulators push to close the cookie jar of cheap rescue cash that access to Federal Home Loan Banks has provided.

After a review of the system that lasted more than a year, the Federal Housing Finance Agency will move FHLBs away from serving as lenders of last resort for financial firms in turmoil, and back to their roots in housing finance. Specifically, the plans ratchet up federal oversight and seek to push banks toward the Fed’s discount window in times of extreme stress, according to a report to be published Tuesday.

As Bloomberg reports, banks borrow hundreds of billions of dollars from the government-chartered FHLBs each year to fulfill short-term funding needs.

The practice came under scrutiny after the FHLBs, which have implied backing from the government, lent heavily to Silicon Valley Bank, Signature Bank and First Republic Bank as they careened toward failure.

The report specifically notes that "concerns with FHLBank lending to significantly deteriorating financial institutions must be addressed."

...advance volumes fell to 20-year lows in late 2021, coinciding with rising volumes of deposits that provided a liquidity cushion for commercial banks during the pandemic.

However, during the week beginning March 13, 2023, the FHLBanks funded $675.6 billion in advances, the largest one-week advance volume in FHLBank System history.

While the FHLBank advances helped many members withstand market stress, Silvergate Bank (an active borrower) voluntarily dissolved in the prior week.

Shortly thereafter, Silicon Valley Bank and Signature Bank failed after actively borrowing from their respective FHLBanks.

First Republic Bank, another member, failed approximately seven weeks later.

As shown in Figure 11, these four entities increased their borrowings from their FHLBanks starting in late 2022.

This resembled a pattern observed in the lead-up to the 2008 crisis, during which the System saw increased borrowing by members in distress just before failure.

The FHLBank System did not incur losses on its advances to these failed members.

The broader financial system, however, incurred losses because of these failures, highlighting the need for greater focus by the FHLBanks on evaluating member creditworthiness and better coordination with their members’ primary regulators when a member’s financial condition is deteriorating.

Even more problematically, the report notes that during the March 2023 bank failures, the FHLBanks also discovered that some large, troubled members had not established the ability to borrow from the Federal Reserve discount window and therefore were overly reliant on the FHLBanks.

While the FHLBanks continue to serve as a source for reliable liquidity - which allows members, particularly smaller members, to continue to serve their communities - the Federal Reserve has long been considered the U.S. banking system’s lender of last resort.

...Nevertheless, during the March 2023 bank failures, the FHLBank System’s role of providing low-cost liquidity came under stress, due to sizable advance demand from large members, some of which were significantly bigger than the FHLBanks themselves.

The reliance of some large, troubled members on the FHLBanks, rather than the Federal Reserve, for liquidity during periods of significant financial stress may be inconsistent with the relative responsibilities of the FHLBanks and the Federal Reserve.

Among the major changes, the Federal Housing Finance Agency, which oversees FHLBs, will propose a rule to force many banks to hold 10% of their assets in mortgage loans to maintain access to the FHLBs.

The regulator is also exploring new guardrails for lending money to troubled institutions and tougher stress tests.

Bloomberg's Alex Harris highlights some of the possible issues:

  • Smaller fed funds market: FHLBs are the largest lender of cash in the market for federal funds. If banks borrow less, FHLBs may have less excess cash to lend

  • Jumpier monetary policy rate: Less volume in the fed funds market could make the fed funds rate -- the US monetary authority’s target benchmark -- more prone to movements within the range, prompting officials to tweak tools to maintain control

  • Less issuance: The FHLB Office of Finance issues agency discount notes to fund system-wide demand for short-term loans, or advances. Fewer advances means less market supply, which may push T-bill yields lower and motivate buyers of FHLB paper, such as money-market funds, to continue parking cash at the Fed’s reverse repo facility

  • Higher costs: If banks have to turn elsewhere for funding, such as to the commercial paper market, that may drive borrowing rates higher for institutions

  • More reserves: Losing a portion of low-cost funding could drive bank liquidity coverage ratios lower, at which point institutions could hold more reserves to fill the funding gap. That means the banking system’s lowest comfortable level of reserves could actually be much higher

Simply put, this regulatory overhaul will ripple through dollar funding markets - and potentially Fed policy - as smaller US banks are forced to pay up for their emergency cash at The Fed's discount window or the BTFP (which will offer the market much more transparency into just how bad the situation is).

And in case you really believed Bill Gross, just a day ago, the NYFed blog reported new models of banking system vulnerability.

The most important change in methodology is that the measures now incorporate unrealized losses (or gains) on all securities. The goal of this change is to reflect more closely the economic value of bank assets in a stress scenario.

Their new measures, adapted to this recent shock, suggest a moderate increase in systemic vulnerability compared to the low levels of the previous ten years.

Tyler Durden Tue, 11/07/2023 - 14:20

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As Balances Soar At Record Pace, Millennials Lead Credit-Card Delinquencies Higher

As Balances Soar At Record Pace, Millennials Lead Credit-Card Delinquencies Higher

Just in case it wasn’t obvious, The NY Fed’s latest report…



As Balances Soar At Record Pace, Millennials Lead Credit-Card Delinquencies Higher

Just in case it wasn't obvious, The NY Fed's latest report on household debt confirms that the strong spending seen in Q3 was driven - drum roll please - by Americans tapping their credit cards by a record amount year-over-year.

Overall, household debt increased by $228 billion last quarter, bringing the total to $17.3 trillion, which included a $48 billion rise in credit-card balances to $1.08 trillion, marking the eighth straight quarter of year-over-year increases, the report found.

Credit-card balances are now $154 billion higher than they were a year ago, the largest annual increase since the New York Fed began tracking the data in 1999, researchers said in a blog post.

No real surprise there - but certainly not the sustainable foundation of growth so many had pinned their hopes on.

However, there is a problem - aggregate delinquency rates were increased in the third quarter of 2023.

“The increase in balances is consistent with strong nominal spending and real GDP growth over the same time frame,” they said in the post.

“But credit card delinquencies continue to rise from their historical lows seen during the pandemic and have now surpassed pre-pandemic levels.”

As of September, 3.0% of outstanding debt was in some stage of delinquency, with credit-card delinquencies' jump standing out...

Most notably, the share of debt becoming newly delinquent is now rising for most types of debt, with the share of newly delinquent credit card users rising in Q3, and now exceeding pre-pandemic average levels...

So, who is behind this sudden surge in delinquencies?

While Baby Boomers (born 1946-64), Generation X (born 1965-79), and Generation Z (born 1995-2011) credit card users have delinquency rates similar to their pre-pandemic levels and trends, Millennials (born 1980-94) credit card users began exceeding pre-pandemic delinquency levels in the middle of last year and now have transition rates 0.4 percentage point higher than in the third quarter of 2019.

Additionally, as one might expect, the lowest-income areas persistently have the highest delinquency rates, but all four quartiles are now above their pre-pandemic levels.

And finally, NYFed notes that borrowers with auto loans (gold line) or student loans (red line) were more likely to fall behind on their loans than before the pandemic. This was especially the case for those with student loans and auto loans (shown in light blue). This group’s transition rate into a credit card delinquency is 0.6 percentage point higher than it was prior to the pandemic. These repayment difficulties will likely continue to mount for student loan borrowers now that student loan payments have resumed.

Whether consumers can keep up with their debt payments and continue spending in the face of higher rates, growing obligations and shrinking savings, is something policymakers and economists are watching closely but given the acceleration in balances and delinquencies, we think the answer is clear.

Tyler Durden Tue, 11/07/2023 - 13:40

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NY Fed Q3 Report: Household Debt Increased

From the NY Fed: Household Debt Rises to $17.29 Trillion Led by Mortgage, Credit Card, and Student Loan Balances
The Federal Reserve Bank of New York’s Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit. The Re…



From the NY Fed: Household Debt Rises to $17.29 Trillion Led by Mortgage, Credit Card, and Student Loan Balances
The Federal Reserve Bank of New York's Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit. The Report shows total household debt increased by $228 billion (1.3%) in the third quarter of 2023, to $17.29 trillion. The report is based on data from the New York Fed’s nationally representative Consumer Credit Panel.

Mortgage balances rose by $126 billion from the previous quarter and stood at $12.14 trillion at the end of September. Credit card balances increased by $48 billion to $1.08 trillion in Q3 2023, representing a 4.7% quarterly increase. Auto loan balances rose by $13 billion, consistent with the upward trajectory seen since 2011, and now stand at $1.6 trillion. Student loan balances increased by $30 billion and now stand at $1.6 trillion. Other balances, which include retail cards and other consumer loans, increased by $2 billion.

Mortgage originations modestly declined to $386 billion in Q3 2023 and are well below the robust quarterly origination volumes observed between 2020 and 2021. The volume of newly originated auto loans, which includes leases, slightly increased and now stands at $179.3 billion. Aggregate limits on credit card accounts increased by $113 billion, a 2.46% increase from the previous quarter.

Aggregate delinquency rates increased in Q3 2023, with 3% of outstanding debt in some stage of delinquency at the end of September. Delinquency transition rates increased for most debt types except student loans and home equity lines of credit. The increases in credit card delinquency were the sharpest among borrowers between the ages of 30 and 39.

“Credit card balances experienced a large jump in the third quarter, consistent with strong consumer spending and real GDP growth,” said Donghoon Lee, Economic Research Advisor at the New York Fed. “The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans.”
emphasis added
Click on graph for larger image.

Here are three graphs from the report:

The first graph shows household debt increased in Q3.  Household debt previously peaked in 2008 and bottomed in Q3 2013. Unlike following the great recession, there wasn't a decline in debt during the pandemic.

From the NY Fed:
Aggregate household debt balances increased by $228 billion in the third quarter of 2023, a 1.3% rise from 2023Q2. Balances now stand at $17.29 trillion and have increased by $3.1 trillion since the end of 2019, just before the pandemic recession.
Delinquency Status The second graph shows the percent of debt in delinquency.

The overall delinquency rate increased in Q3.  From the NY Fed:
Aggregate delinquency rates were increased in the third quarter of 2023. As of September, 3.0% of outstanding debt was in some stage of delinquency, up by 0.4 percentage points from the second quarter yet 1.7 percentage points lower than the fourth quarter of 2019.
Mortgage Originations by Credit Score The third graph shows Mortgage Originations by Credit Score.

From the NY Fed:
Mortgage originations, measured as appearances of new mortgages on consumer credit reports and including both refinance and purchase originations, were at $386 billion in 2023Q3, a modest decline from the previous quarter and well below the trillion-dollar-plus quarterly origination volumes observed between 2020 and 2021 ... The median credit score for newly originated mortgages was flat at 770.
There is much more in the report.

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