The Markets Hold Their Breath Waiting For The FOMC Minutes…

July 7, 2021

* The Dollar Index surges on Tuesday… 

* The ISM Services Index falls out of bed in June! 

Good day… And a Wonderful Wednesday to you! Today is finally the day that I’ll find out what’s causing the excruciating pain, at times, in my head, as I report to the hospital at noon for an MRI of my brain. As I said, kiddingly last week, spoiler alert: They won’t find one! HA! The reason for this pain has been on my mind for 2 weeks now… Do you know all the horrible outcomes you can conger up in two weeks?  Well, I’m here to say that I doubt seriously that it’s cancer related, for I’ve been on daily chemo for  the majority of 14 years… And the short periods of time that I wasn’t on chemo, is when I had tumors in my left eye, and right mandible (jaw)… And I didn’t bump my head on anything, recently, although, when I was a youngster, I was knocked out a few times on the football field…  Ok, enough of that! My second fave Doobie Brothers song greets me this morning: Another Park, Another Sunday…  “ City streets and lonely highways I travel down. My car is empty and the radio just seems to bring me down I’m just tryin’ to find me A pretty smile that I can get into….It’s true, I’m lost without you”

Another day of stuck in the mud for the currencies… The euro say a tiny bit of slippage during the day, and the Aussie dollar (A$) lost ¾’s of a cent on the day. The BBDXY started the day at 1,140.37 and ended it at 1,144.42… A strong move in the index, but across the board the currencies all looked at or near their trading figures of yesterday… The price of Oil saw a huge slippage in price yesterday, falling from $76 on Monday to $73 and change on Tuesday… Here’s something for you to think about… All the gas stations raised their prices for gas on Monday… How long do you think it will take them to lower them again? Yeah… they’ll drag their feed… and get every red cent they can get from you and me who need gas to motor our vehicles…

Gold started the day yesterday up $18 but couldn’t hold or add to that early morning gain, and ended the day only up $4.30… Silver couldn’t hold its 18-cent gain and ended the day losing 35-cents, but remaining above $26…  The only inflation news I saw yesterday was the price of propane has doubled since early in the year, and is now $1.00 I have a big honking gas grill that I never use any longer… Only opting for charcoal either with my Big Green Egg, or Weber grill…  That big honking gas grill used to go through a tank of propane in a month, and I would have to take it out, go to the hardware store and get it filled… I can’t imagine what that would cost per month today!  Well, I guess I can if I really put my mind to it, but that hurts my head, so I won’t…

In the overnight markets last night…. The markets were surprised by the huge jump in the Dollar Index yesterday, and I’m scratching my bald head trying to figure that one out too… The Currencies, overnight stayed in their recent ranges, and Gold & Silver are back on the rally tracks this morning, with Gold up $9.50, and Silver up 25-cents… 

The only piece of data yesterday shouldn’t have helped the dollar, as the Services Index (ISM) fell out of bed, falling from 64 in May, to 6o in June… it was pointed out that this is a sign of stagflation… prices go up but production goes down… Well, what ever it is, it shouldn’t have led to a rally in the dollar index!  

Leads me to believe that the folks that administer the Exchange Stabilization Fund (ESF) were bored and had to spend some of the ESF’s funds… The dollar index rallies, and Gold & Silver can’t hold their early gains… while the Services Index falls out of bed…  Something smells fishy here and it isn’t yesterday’s catch! 

So, have you been reading about the Reverse Repos at the Fed?  Yeah, it’s gotten crazy again, with banks just laying off all their low yielding stuff to the Fed….   The banks then just leave the cash that Fed pays them at the Fed… I’ve got a story for you in the FWIW section today that talks about this and what it’s doing in the markets, so stay tuned, don’t change that dial!

Well, the U.S. Data Cupboard today has the Fed’s FOMC Meeting Minutes, that I talked about yesterday… The markets will be holding their collective breaths until these minutes are printed this afternoon..  I say.. what’s the big deal? Since the meeting Fed Chairman Jerome Powell has talked a couple of times and explained that interest rates aren’t going to be raised until 2023… End of discussion… But the markets being markets will make a big deal out of these minutes… So hang onto your hats today, the wind will be gusting at times from the FOMC Meeting Minutes. 

To recap… There was a HUGE rally in the Dollar Index yesterday, but most of the currencies remained in their recent ranges, with only the A$ getting whacked, but it’s not part of the dollar index, so what ever is going on there is above my pay grade… Gold couldn’t hold its huge early morning gain of $18 yesterday, and only gained $4.30 on the day, and Silver did the same, losing its early morning gain of 18-cents to end the day down 35-cents… Chuck believes the ESF was back at work buying dollars…  Chuck also points out the mess in the reverse repos market… 

For What It’s Worth… Well I set this article up earlier this morning, so you know what it’s about… Those darned reverse repos… And this article quotes a man who has pointed out that this was a mess before the pandemic and now it’s even messier, and the article can be found here: Zoltan Sees Reverse Repo Hitting $2 Trillion In Weeks: What Happens Then | ZeroHedge

Or, here’s your snippet: “Two weeks ago, in the aftermath of the Fed’s surprise hawkish FOMC announcement which also hiked the administered rates on the Fed’s overnight repo and IOER facilities by 5bps to 0.05% and 0.15% respectively, we quoted Credit Suisse repo guru Zoltan Pozsar who explained it best in his post-mortem, writing that “the re-priced RRP facility will become a problem for the banking system fast: the banking system is going from being asset constrained (deposits flooding in, but nowhere to lend them but to the Fed), to being liability constrained (deposits slipping away and nowhere to replace them but in the money market).”

What he means by that is that whereas previously the RRP rate of 0.00% did not reward allocation of inert, excess reserves but merely provided a place to park them, now that the Fed is providing a generous yield pick up compared to rates offered by trillions in Bills, we are about to see a sea-change in the overnight, money-market, as trillions in capital reallocate away from traditional investments and into the the Fed’s RRP.

In other words, as Pozsar puts it, “the RRP facility started to sterilize reserves… with more to come.” And just as Deutsche Bank explained why the Fed’s signaling was an r* policy error, to Pozsar, the Fed also made a policy error – only this time with its technical rates – by sterilizing reserves because “it’s one thing to raise the rate on the RRP facility when an increase was not strictly speaking necessary, and it’s another to raise it “unduly” high – as one money fund manager put it, “yesterday we could not even get a basis points a year; to get endless paper at five basis points from the most trusted counterparty is a dream come true.”

5bps is too generous, according to Pozsar who warns that the new reverse repo rate will upset the state of “singularity” and “like heat-seeking missiles, money market investors move hundreds of billions, making sharp, 90º turns hunting for even a basis point of yield at the zero bound – at 5 bps, money funds have an incentive to trade out of all their Treasury bills and park cash at the RRP facility.”

Indeed, as shown below, bills yield less than 5 bps out to 6 months, and money funds have over $2 trillion of bills. They got an the incentive to sell, while others have the incentive to buy: institutions whose deposits have been “tolerated” by banks until now earning zero interest have an incentive to harvest the 0-5 bps range the bill curve has to offer. Putting your cash at a basis point in bills is better than deposits at zero. So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain.”

Chuck again… Ok folks this is a part of the markets that you don’t deal in, and so you are wondering why I chose to print this today… Well, it’s all about banking and what the banks are doing, and you have cash in the bank, do you not? It’s a vision of what’s to come… mark my words on that! And that’s not a good thing, as I don’t see all this working out smoothly, and no one going home with tears in their eyes…  I’m just saying… 

Before I head to the Big Finish today, I wanted share with you this quote, that good friend Dennis Miller sent me yesterday… Don’t just read it once… Read it again, and again, until you completely understand what he’s telling you: “”What are the differences between Mark Zuckerberg and me? I give private information on corporations to you for free, and I’m a villain. Zuckerberg gives your private information to corporations for money and he’s Man of the Year.”

Julian Assange

Market prices 7/7/2021: American Style: A$ .7516,  kiwi .7048, C$ .8040, euro 1.1822, sterling 1.3835, Swiss $1.0829, European Style: rand 14.3084, krone 8.6718, SEK 8.6164,  forint 300.82,   zloty 3.8205,  koruna 21.7084, RUB 73.77, yen 110.71, sing 1.3465, HKD 7.7673, INR 74.60, China 6.4674, peso 19.95, BRL 5.1333, BBDXY 1,143.53, Dollar Index 92.54,  Oil $74.65, 10-year 1.35%, Silver $26.47, Platinum $1,104.00, Palladium $2,934.00, Copper $4.33, and Gold… $1,807.50

That’s it for today… Another Chamber of Commerce day here in my summer home…  I read yesterday that there was a map printed of the hot spots around the world… I sure hope they didn’t mistake the Midwest for a hot spot! Because we aren’t! You know, in the 60’s, I recall two weeks in the summer one year, where the daily temperature was above 100… No one was screaming about hot spots then, it was summer! And while I’m on that subject, have you ever noticed the nightly weather reports where they show the record high dates? They’re always from the early 1900’s! Well, not always, but most of the time… And those folks didn’t have air conditioning! Tough Old birds, for sure! My beloved Cardinals  won again in San Fran last night… Of course I couldn’t stay up to watch the game, as it was played in San Francisco and started about the time I’m about to call it day… Same thing tonight, and then I do believe the Cardinals are finished playing on the West Coast for this year… YAHOO! The Rolling Stones take us to the finish line today with their song: Dead Flowers…  (I love this song!) It’s from the Sticky Fingers album, of which is the only Stones album I own… I hope you have a Wonderful Wednesday, and please Be Good To Yourself!

Chuck Butler