An important lesson I try to teach my teenage daughter is the concept of “Money”. Why - I ask her - is she so certain that a piece of paper commands so much power and gives her confidence that the guy across the counter will accept it when she wants to buy a earring, an espresso or an experience?
It is impossible to understand Money without understanding 3 words – Solvency, Liquidity and Central Banking.
In March, among the euphoria and din of hotter than expected inflation prints, weaker than expected retail sales, higher than expected jobs, spiking bond yields, collapsing credit spreads, weakening EV sales, rising DXY and plunging currencies, resurging manufacturing, etc, there were 3 events that almost went unnoticed by the average retail investor and the broader student of money.
ECB's New Operational Framework https://lnkd.in/gJP3HnPH
RBAs New Operational Framework https://lnkd.in/gfaSDFa6
A Bloomberg article “Xi Cryptic Bond Comments Hint at PBOC Becoming More Like Fed"
https://lnkd.in/gPZS49Fq
This note does not explain monetary policy implementation of these Central Banks. Indeed it would be impossible to explain with a 3000 character constraint.
However, the key point is this. In the good old days, prior to a bunch of bankers deciding to pile on obscene leverage and bet deposits into an array of risky real estate and low grade corporate debt, the wheels of our financing system were oiled by liquidity provided by CBs on a “need” or “demand” basis. This was a “Scarce Reserves or a Corridor System”.
The GFC, by choice or by force, made CBs pour enormous liquidity into the system. This was an “Ample Reserves” system. While arguably this achieved the more economic growth, higher benign inflation and financial stability, it also resulted in bloated CB balance sheets and a dull third party funding market. A reality despised by most Central Bankers.
Pandemic fuelled inflation and fiscal magnanimity has given Central Bankers the opportunity to correct this flaw and reduce their foot print. Yet, at the same time the scars of Sep 19 Repo Tantrum, which essentially resulted from an underestimation of the liquidity required in the system, are still fresh in memory.
The ECB and the RBA’s new system basically says – we will keep the system flush with liquidity. But, you Mr Dealer & Mr Banker, need to come and ask me for liquidity and I promise to provide all the liquidity you need (full allotment auctions).
At the other end of the spectrum, an Old Xi Jinping speech created flutter in markets causing speculation China might commence QE as it tries to cure malaise that has gripped its economy over the past 2 yrs.
Tighter liquidity in USD, EUR $ AUD, gradual but prolonged rate hikes in JPY and potential QE in China – You do the math !
www.thecreditbalance.com
Director @LPA | Sales, Trading, Treasury | Derivatives, Pricing, Structuring, xVA, IBOR-Transition, AI
2moHappy Birthday Dear €STR! As outlined in my post (https://www.linkedin.com/feed/update/urn:li:activity:7247130705405603840/), this is a significant step for European interest rates markets. The key question remains: Is €STR “only” an EONIA replacement or is there a more far-reaching adaptation in the market. Happy to discuss!