With the Fed\u2019s recent yearn for \u201chot inflation\u201d in which can be attributed to the recently low IOER rates and highly active lending facilities. But now the Fed has to address a new problem with the fragility of the rising rates and inflation. Given that yes, consumption has risen 10% over the new year, we still have to keep in mind that aggregate consumption and inflation is continuing to outpace wage growth in real and nominal terms. This trend, without a backstop, could send USD demand to the levels seen in March of 2020 along with the level of aggregate insolvency; in which would leave the US, and subsequently the global economy in shambles paired with a massive liquidity inefficiency\/diseconomies of scale. Luckily for all of us who are price \u201ctakers”, the Fed has \u201d1.5\u201d route(s) they can take to continue to provide the liquidity needed for the aggregate economy. <\/p>\n\n\n\n

(1)<\/strong> The continuation of Fed QE\/repurchase agreements and eventually a further easing of SLR minimums: <\/strong><\/p>\n\n\n\n

This, in theory, will ease the primary dealer holdings on Treasuries. This could mitigate the speculation derived inflation pressures and create more of an \u201corganic\u201d style of inflation (more like \u201cre-inflation\u201d) for the economy, i.e., allowing PMI (if trends continue) to continue to exceed 10y yields and inflation rates even in a \u201csticky wage\u201d environ<\/em>ment. <\/p>\n\n\n\n

(0.5) <\/em><\/strong>Let the Treasury set the stage: <\/strong><\/em><\/p>\n\n\n\n

With the Treasury setting its borrowing expectations at approximately $370Bn in H1 2020 which is projected to have an estimate of a $1.25Tn drawdown in the Treasury General Account alone in H1 2021 given the expected stimulus package deals. This will allow even more cash to sit in the banking system (given that QE must remain) in which will ease the impending tightening financial conditions ahead. <\/em><\/p>\n\n\n\n

What to expect forward?<\/h3>\n\n\n\n

The ECB has extended their liquidity facilities (via PEPP) to the point where this would negate the effects of excess USD in LBOR terms. Given the perfect storm for USD strength, this will allow the EUR\/USD to fill the pricing imbalance (created by USD liquidity expectations relative to the Euro +US inflation & growth expectations) left at 1.16. <\/p>\n\n\n\n

            This dynamic will also be accentuated amongst the EM currencies as the USD will continue to be in higher demand given the new set growth expectations vs. ROW (by way of stimulus and vaccination efficiency). In overall expect the USD to continue strengthen thought H1 2021 and early Q3 2021. <\/p>\n\n\n\n

            Given the expected excess liquidity within US markets, look for sectors such as financials, RE, logistics, and leisure to reap the largest benefits of the new environment. Also look for treasury yields to continue to rise, but taper in velocity, as the monetary base and M2 velocity should begin to experience modest upward convergence. This could lead the tech sector towards a virtue of diminishing returns, and non-discretionary goods firms into a balance sheet-oriented (Note: keep firms with high Q4 capex on your watchlist) \u201csurvival of the fittest\u201d. <\/p>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

(03\/08\/2021) “The Federal Reserve Board on Monday announced it will extend its Paycheck Protection Program Liquidity Facility, or PPPLF, by three months to June 30, 2021. The extension will provide continued support for the flow of credit to small businesses through the Paycheck Protection Program, or PPP”. https:\/\/www.federalreserve.gov\/newsevents\/pressreleases\/monetary20210308a.htm The financial markets have seen the reflation trade make a comeback with […]<\/p>\n","protected":false},"author":1,"featured_media":994,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[54,41],"tags":[],"class_list":["post-469","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","category-us-markets"],"_links":{"self":[{"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/posts\/469","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/comments?post=469"}],"version-history":[{"count":5,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/posts\/469\/revisions"}],"predecessor-version":[{"id":997,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/posts\/469\/revisions\/997"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/media\/994"}],"wp:attachment":[{"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/media?parent=469"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/categories?post=469"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gumbeauxcapital.com\/wp-json\/wp\/v2\/tags?post=469"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}