Overseas macro market biweekly report: what will be the impact if the table is reduced in May?

Core view

The minutes of the March meeting of the Federal Reserve revealed the details of the table contraction: the Federal Reserve will start the table contraction as soon as may; The way of this reduction is to reduce the reinvestment of assets held by the Federal Reserve; The upper limit of this table reduction is set to US $60 billion of US bonds and US $35 billion of MBS, and the scale of table reduction will reach the upper limit at least three months later; As the prepayment of MBS may not touch the upper limit of table reduction, the Federal Reserve may sell MBS directly to the market. This shrinkage is characterized by high speed and great strength.

The Fed's scale reduction will directly affect the liquidity of financial markets: Generally speaking, if the Fed starts to scale down, banks and money market funds need to consume bank reserves or onrrp to meet the new Treasury bond issuance needs of the Ministry of finance. In view of the high reserve size and onrrp usage of U.S. depository institutions, we believe that the liquidity of U.S. financial market will remain abundant in the short term. However, considering the large scale reduction intensity, it may send a signal of rapid liquidity contraction to the market, but it will further accelerate the liquidity contraction. The subsequent liquidity indicators of the US financial market deserve attention.

Compared with quantitative easing, this contraction has less impact on the economy: compared with quantitative easing, the utility of contraction and Federal Reserve expansion is not symmetrical. Before the implementation of the quantitative easing policy, the liquidity of the U.S. financial market is often tight. Quantitative easing can effectively reduce the cost of inter-bank financing and send a signal to the market that the Federal Reserve intends to keep the policy interest rate low for a long time. Before the start of the reduction, the liquidity of the US financial market was relatively abundant, and the reduction had little impact on the financial market.

Tracking of overseas epidemic situation and vaccination progress: Recently, covid-19 epidemic has accelerated in Europe and Asia. As of April 12, 2022 Beijing time, South Korea, Italy, Japan, Germany and Australia are the five countries with the largest number of newly confirmed cases per day; South Korea, Russia, France, Britain and Italy are the five countries with the largest number of new deaths per day. The overall covid-19 cases in the United States in the past two weeks seem to be stabilizing, but some disease experts pointed out that incomplete data and information in the United States are likely to mask the fact that covid-19 cases are still surging in the United States.

Overview of the trend of major assets in the two weeks:

US stocks: in the past two weeks, US stocks have fluctuated downward. From March 31 to April 14, S & P fell 1.85% and closed at 444659 on April 12; The Dow fell 0.33% to close at 3456459 on April 12; The NASDAQ fell 4.06% to close at 1364359 on April 12.

US Treasuries: the interest rates of us long-end and short-end treasury bonds have risen sharply in the past two weeks. As of April 13, the interest rate of us 10-year Treasury bond was reported at 2.7%, up 38 BP in the past two weeks, and the real interest rate of 10-year Treasury bond rose 42 BP to - 0.1%; The interest rate of two-year Treasury bonds was 2.37%, up 9bp in the past two weeks.

The price of gold in London rose significantly, reporting US $1977.4 per ounce on April 13.

The dollar index continued to rise to 998387 on April 13.

The price of oil distribution was relatively volatile, with a daily report of 108.78 US dollars / barrel on April 13.

The price of Lun copper fluctuated and fell, with us $10284 / ton reported on April 13.

Risk tip: the impact of the outbreak of overseas epidemic on the economy is higher than expected, global commodity prices rise again, and extreme climate has an impact on the global supply chain.

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