Good morning. The past week was full of news and some significant market action. We had two minor developments in the US rates space. The FED will unexpectedly end the BTFP Program, created last year to support mostly regional banks from the deposit flight and unmarked loss in their US bonds holdings as both funding pressures have been subsidized and banks currently use this 130b facility to freely arbitrage the FED rates. I expect that it will create some pressure on the sub-sector in the short term. The second was the poor uptake of yesterday's 5y issuance (large tail), as the market becomes more hesitant ahead of the FED plans for this year's mix of issuance (QRA). Unfortunately, Yellen holds the key to short-term USD liquidity equilibrium and the market will play the following path: More bills = more USD liquidity = lower yields = higher equities, weaker USD =easier financial conditions. The q4 deciphered playbook comes at odds with the FED's desirable path for economic activity and inflation targeting. So let's see what the outcome will be by the end of the month!
The second interesting macro point was yesterday's US PMIs, which came out very strong and above expectations. These helped the USD recover some of the lost ground but the devil is in the details. Inventories were drawn down but finished goods stayed elevated, meaning that we didn't witness economic expansion (demand) but factors like the cold wave and the supply bottlenecks from the Panama/Suez bottlenecks are starting to bite. The same happened to the huge oil inventory draw witnessed this week. Today the ECB kept rates unchanged, as expected, and Lanes, which is more credible than Lagarde, ruled out any move for Q1, on a lack of full first-quarter employment data.
The intriguing moves are happening in equities. As discussed, the market is laser-focused only in large-cap growth stocks and last year's outperformance in AI themes has resumed with a new phase of parabolic moves in selected names. Of course, ignoring the stellar guidance from TSM and the record backlog from ASML would be a rooky mistake, the sector has power and perspectives, and valuations are secondary in a thematic-driven market. But also we have profit warnings from the analog complex (TXN, STM). Also outright bad numbers from BASF and DD (maintain zero exposure in the sector). Shocking profit warning from HUM this morning and an accounting scandal in the ADM giant. Strong numbers from Netflix and management choices are validated once again, kudos to them. An anticipated profit warning from Tesla will shake the complex a little, I found Musk CC comments rarely honest, for a change.