The impact of Build Back Better on the interbank market will be reduced by increasing likelihood Democrats failing to come together on its passage… And Jerome Powell may benefit

According to the Tax Foundation, a public policy think tank, President Biden’s proposed “Build Back Better” plan will generate government revenues of $2.1 trillion over the next ten years.  After accounting for approximately $1 trillion in tax credits for individuals and businesses, the Tax Foundation estimates the US government will net just over $1 trillion in revenues over the ten-year period.  This amount can be whittled down further by accounting for tax revenues recovered from increased compliance activity bringing the estimated bottom-line amount generated to $862 billion.

The economic price for the proposal, according to the Tax Foundation, would be a decrease in long-run gross domestic product by .98%; a reduction in capital stock of 1.84%; a wage rate reduction of .68%; and net loss of 303,000 jobs.

Meanwhile, the Committee for a Responsible Federal Budget, a public policy think tank, estimates that after accounting for offsets and expiration of a number of programs, Mr Biden’s “Build Back Better” plan will require financing of another $2.9 trillion of debt.  The Committee estimates that interest on new debt may be $1.1 trillion by 2031.

Today, the yield on the ten-year Treasury note closed at 1.48%, according to data by Bloomberg, after getting as high as 1.50%.  It is unclear whether the increase in rates accounts for passage tax increases and social welfare spending contained in the “Build Back Better” plan.

The future economic impact from this plan appears to be flat over the next ten years.  A .98 percent reduction in economic growth over ten years is negligible.  So is a loss of 303,000 jobs.  In addition, Speaker Nancy Pelosi is signaling to the progressive wing of the Democratic Party that they may have to settle for a plan that falls short of $3.5 trillion.  If the bill fails in the House, not only is impact a moot concern, but the Democrats and Mr Biden will see a further drop in their political capital where their constituents see them as incapable of delivering on big ideas.

If the package fails, I can see some upside for Jerome Powell, current chairman of the Board of Governors of the Federal Reserve.  Mr Powell’s tenure as chair ends in February 2022.  A failed Biden economic passage brought on by a fractured party may mean that Mr Biden will have to take any opportunity to infuse confidence in the American economy.  So far, the Federal Reserve has been that one constant.  Mr Biden may have no choice, especially going into the mid-term election campaign season, but to re-appoint Mr Powell to another term as head of the Fed.

Alton Drew

27 September 2021  

Interbank Market News Scan: The Bank of Canada held its policy rate today, but I was nervous about USD-CAD

The Bank of Canada today held its policy rate at .25% citing the effectiveness of its quantitative easing program which is currently comprised of asset purchases of CAD 2 billion a week. While seeing a recovery in its economy, Covid-19 and supply chain disruptions were noted as the usual suspects for dampening of economic growth in certain sectors.

The Bank noted contraction in its export sector, in particular its auto industry with consumption, business investment, and government spending contributing to Canada’s economy.  Inflation is running around 3.7%, much hotter than its 2% target.

From a yield and inflation aspect, I could not see why Americans would want to move dollars into Canada’s economy.  Granted U.S. inflation, at 5.4% over the last 12 months, is running hotter than inflation in Canada.  However, according to data from Bloomberg, ten-year treasury yields are higher in the U.S. (1.35%) than they are in Canada (1.21%).

Yesterday, data from Reuters showed the USD/CAD closing around 1.2621 and I quite frankly thought (in my gut) that the exchange rate would decrease by 11:00 am EST but decided to hold out for the Bank of Canada narrative on rates.  I did not see much change in this report versus last month’s monetary policy release.  I also did not see any calls for changes in monetary policy which added support, in my opinion, to an expected increase in USD/CAD.

The takeaway for me is there is nothing wrong with listening to your gut but always challenge the feeling with data and vice versa. 

Please feel free to share thoughts on central bank decisions and foreign exchange.  

Happy Star Trek Day!

Alton Drew

8 September 2021

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Interbank Market News Scan: The Fed speak not providing much to shift foreign exchange markets …

A Bloomberg interview with Federal Reserve Bank of Dallas president Robert Kaplan along with remarks by Federal Reserve Board vice-chair Richard Clarida and Federal Reserve Bank of Atlanta president Raphael Bostick did not provide much information to attribute to any shifts in the foreign exchange markets. 

In a 9 August 2021 interview with Bloomberg, Mr Kaplan expressed confidence about where the fed funds rate, the overnight rate for loans between Fed member banks, stood.  The current target range of the fed funds rate is between 0 and .25%. 

Mr Kaplan expressed caution that the fed funds rate and the effects of asset purchases by the Federal Reserve be looked at separately.  Currently the Federal Reserve is purchasing $120 billion a month of US Treasury securities and agency-backed securities as part of a strategy to keep liquidity in the credit markets while keeping borrowing rates low.  The Federal Reserve’s monetary policy is designed to add fuel to U.S. economic growth by making lower cost credit available to businesses.    

In remarks made the following day, Federal Reserve vice-chair Clarida noted that the U.S. was out of the recession precipitated by government lock down of the economy in March 2020.  He expects the economy to continue its expansion through next year while cautioning that growth will be tempered by a variant of the coronavirus responsible for the Covid-19 pandemic.  Vice-chairman Clarida does see unemployment continuing to fall through 2023 along with inflation which he forecasts to be around 2.2% in 2022 and 2023.

The Federal Reserve is today following a flexible rate policy that will allow the economy to run periodically over its inflation target of 2%.  Dallas Fed president Kaplan did note that businesses are expecting to raise prices, in line with Federal Reserve forecasts on inflation.  Mr Kaplan also noted that there was an active debate regarding when the Federal Reserve would start cutting back on its monthly $120 billion a month asset purchases. Mr Kaplan also believes that adjusting asset purchases now would put less pressure on the fed funds rate.

As Federal Reserve Bank of Atlanta president Bostick shared today, the two percent inflation target number is thought by the Federal Reserve to be the appropriate numerical goal to mitigate the risks of deflation.  The rate, as a pre-condition to a healthy economy, is seen as appropriate in assisting households protect themselves from any changes in purchasing power.

The takeaway for traders is that sluggish growth in the US in 2022 and 2023 may result in tempered appreciation of the dollar’s value in those years.  So far, the Federal Reserve is seeing little change in relative income or price changes.  Nor does the Federal Reserve seem to signaling much in relative interest changes, at least in the short to intermediate term.  

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

Interbank Market News Scan: Is Jeff Bezos on the way to building a digital country?

27 July 2021

Links to follow

However, what fewer people are aware of is the way that the app world has transformed the forex industry. Forex trading apps have proliferated in recent years, and it’s easy to see why: these apps offer a chance to keep up to date with the latest events in the market, and make the taking of real-time trading decisions possible. https://techbullion.com/how-foreign-exchange-apps-are-changing-the-trading-industry/

Speculations about Amazon set to accept Bitcoin as a form of payment by the end of the year have been growing, following a job posting for a “Digital Currency and Blockchain Product Lead.” Bitcoin Prices Surge Thanks to Amazon Rumors (yahoo.com)

El Salvador is the first country to declare bitcoin legal tender. But the experiment raises big questions about what will happen next — for bitcoin and the country itself. El Salvador made bitcoin a legal currency. Now it gets interesting (cnbc.com)

Six things that happened in crypto this past week. Crypto news: bitcoin rally, Amazon digital currency expert, tether probe (cnbc.com)

The Takeaway: Is Jeff Bezos on the way to building a digital country?

There is some buzz about possible acceptance by Amazon of bitcoin as digital payment for its goods and services.  The speculation is in part a result of Amazon’s recruitment of a digital currency and blockchain product lead.  However, Amazon’s global delivery platform combined with its own digital token could take Amazon to heights higher than its New Shepard rocket.  Futures commission merchants and retail foreign exchange dealers (brokerages and brokers) should envision such a digital token as a significant future foreign exchange trade.

How soon this trade comes about depends on how quickly Amazon can design, test, and deploy a token.  I believe enough of a platform necessary for supporting a digital token is already in place.  Let us start with an important consumer item: food. 

A digital country will need a food distribution system to sustain it.  Amazon’s purchase of Whole Foods in 2017 gave the company at the time of the acquisition a retail footprint and distribution network valued at $14 billion.  With its goal of being “the Earth’s most customer-centric company”, encouraging farmers and other food processing vendors to use its digital tender creates currency agents that can trade that valuable token with other commercial entities. 

In addition to food distribution, lying at the heart of the Amazon economy are the transactions conducted on its network.  Merchants of all stripes trade on Amazon’s network.  Amazon’s attempts at facilitating trade by creating an online space for vendors who would otherwise be frozen out of a traditional brick and mortar business due to costs are generating revenues for the company and enhancing its brand as merchant centric.  Like farmers and food processors, merchants who choose to use an Amazon token become currency merchants for the company by turning around and trading the tokens into consumer, other retailer, and wholesale markets.

Lastly, pushing up Amazon’s value further will be its data and information services game.  Amazon’s cloud services and its electronic devices such as Kindle and Alexa collect data and make that data available for sale.  Allowing consumers, governments, and commercial enterprises to purchase Amazon data products and output with its tender will only help increase a digital token’s value.

It is tempting to say that there is a way to go before Amazon comes up with a digital token of their own to rival bitcoin or other cryptocurrencies, but with technology, “long way off” is around the corner.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

— Alton Drew

Rates reported by the Federal Reserve (Release Date 26 July 2021)

Effective Fed Funds Rate: 0.10%

Discount Window:  0.25%

Prime Bank Rate: 3.25%

3-month Treasury bill: 0.05%

6-month Treasury bill: 0.05%

1-year Treasury bill: 0.07%

Prices

Exchange rates of interest as of 1:39 am EST

Currency pairExchange rate
AUD/USD*0.7381
EUR/USD*1.1802
GBP/USD*1.3826
USD/CAD*1.2543
USD/CHF*0.9162
USD/JPY*110.1800
USD/MXN*20.0290
Source: *Reuters

Interbank Market News Scan: What traders need to know about politics …

What Traders Need to Know About Politics: Capital Hates Labor

Regurgitating textbook definitions of economic growth i.e., growth in employment or gross domestic product, etc., only throws you off the mark leaving you frustrated as you ask yourself, “Why are more people being left behind while others see growth in their stock portfolios?”

Economics has never been about growth in employment. Economics is about managing capital with the appropriate amount of labor and technology such that asset values grow. It means pushing the envelope on returns to capital by raising prices so that when discounted by some rate, the present value of the asset can increase thus increasing the value of an individual’s portfolio so that they can leverage the portfolio as collateral for borrowing money at low rates and buying bonds and stocks generating a yield greater than the interest they borrowed at.

In short, today’s economics is about optimizing the carry trade.

This approach to economics was exposed in 2007 and 2008. If this growth in income and asset value (the only inflation that matters) can be achieved without hiring another soul, the wealthy would be happy.

The politician’s job is to distract the low and middle-income populace with narratives of “attacks on democracy” “diversity and inclusion” and “climate change.” Throw in “gun violence” policy and attacks on the big banks ala Elizabeth Warren and Bernie Sanders and the masses really keep their eyes off the ball.

The politicians that are shedding crocodile tears over today’s inflation figures are either ignorant as to true economics or are putting on a show scripted by their supporting political action committees in order to throw the electorate off of the scent. Needless to say, I think it is the latter.

So, when your favorite politicians are telling you that they are looking out for your economic well-being by offering you $300 tax credits and promising you that they will beat up on the banks that are raising your interest rates on the adjustable-rate mortgage you foolhardily took out or dragging supermarkets into a hearing for raising the price on your T-bone steaks, ignore them. Their job is to ensure the distraction by cheerleading the greatness of their fiscal policies that eventually result in higher taxes or their social programs purposefully designed to be effective no more than eighteen months, assuming they are effective at all….

Meanwhile, replace fluffy concepts such as “economy” and “fiscal policy.” Accept that “socialism” and “capitalism” are policy terms designed more to divide, conquer, and garner votes versus helping put food on your table. Learn to accept that “capital” despises “labor” and her goal is to exterminate you or relegate you to an Andrew Yang universal basic income scheme. Stop repeating what you’ve read in a textbook. All lies. Either you have something of high value to trade for low value currency or you don’t. That is as “economy” as you need to get.

Exchange rates of interest as of 9:52 am AST

Currency pairExchange rate
AUD/USD*0.7422
EUR/USD*1.1793
GBP/USD*1.3804
USD/CAD*1.2593
USD/CHF*0.9182
USD/JPY*110.1900
USD/XCD+2.7000
USD/NGN+409.8540
USD/MXN*19.8603
Sources: *Reuters +OANDA

Rates reported by the Federal Reserve (Release Date 15 July 2021)

Effective Fed Funds Rate: 0.10%

Discount Window:  0.25%

Prime Bank Rate: 3.25%

3-month Treasury bill: 0.06%

6-month Treasury bill: 0.05%

1-year Treasury bill: 0.08%

Interbank Market News Scan: Powell to deliver testimony before Congress on monetary policy …

14 July 2021

Federal Reserve chairman today speaks on state of monetary policy.

Federal Reserve Board chairman Jerome Powell today will share with Congress his outlook on monetary policy as the United States economy continues to pull itself out of the economic doldrums imposed on it by the Covid-19 pandemic.  Mr Powell will share his observation that as the American economy continues to move toward levels of pre-pandemic economic performance, it will climb through transitory periods of inflation.  Increases in consumer prices may primarily be due to restraints on supply due in part to stressed supply chains.

Mr Powell will testify that the Federal Reserve is still focused on its long-term inflation goal of two percent.  Mr Powell will also note that asset valuations are increasing which in turn is feeding risk appetite amongst investors.  Mr Powell will also advise Congress that the Federal Reserve will continue to maintain its current policy of purchasing Treasury securities and agency mortgage-backed securities currently amounting to $120 billion per month until labor market and other economic factors such as stable prices improve.

Mr Powell’s semi-annual monetary policy report to Congress is submitted pursuant to Section 2B of the Federal Reserve Act. The monetary policy report did not go into any detail regarding international trade or exchange rates.

For a consultation on any regulatory or legislative discussions or announcements during today’s hearing, please reach out to us at altondrew@altondrew.com to reserve an appointment.

Exchange rates of interest as of 12:15 pm AST

Currency pairExchange rate
AUD/USD*0.7478
EUR/USD*1.1819
GBP/USD*1.3879
USD/CAD*1.2454
USD/CHF*0.9163
USD/JPY*110.1200
USD/XCD+2.7000
USD/NGN+410.3770
USD/MXN*19.9560
Sources: *Reuters +OANDA

Rates reported by the Federal Reserve (Release Date 13 July 2021)

Effective Fed Funds Rate: 0.10%

Discount Window:  0.25%

Prime Bank Rate: 3.25%

3-month Treasury bill: 0.05%

6-month Treasury bill: 0.06%

1-year Treasury bill: 0.07%

Interbank Market News Scan: Federal Reserve Bank of New York releases consumer survey …

12 July 2021

Links to follow …

Federal Reserve Bank of New York. The Federal Reserve Bank of New York’s Center for Microeconomic Data released the June 2021 Survey of Consumer Expectations, which shows an increase in the median inflation expectations at the short-term horizon, while inflation expectations at the medium-term horizon remained unchanged. Consumers’ Short-term Inflation, Income, and Spending Expectations Continue to Rise – FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)

Bank of International Settlements. “We have learnt that deep recessions, especially if accompanied by severe financial distress, may have long-lasting effects on potential output, in particular through a reduction in the speed and quality of capital increase.” — Ignazio Visco. Ignazio Visco: Introductory remarks – Annual Conference of the Global Forum on Productivity (bis.org)

Exchange rates of interest as of 1:00 am AST

Currency pairExchange rate
USD/XCDXCD 2.7000
USD/MXNMXN 19.8943
USD/JMDJMD 149.5790
USD/DOPDOP 56.5778
USD/HTGHTG 92.2640
USD/NGNNGN 409.9330
USD/GHSGHS 5.9082
USD/INRINR 74.3350
Source: OANDA

No interbank market related legal news to report …

Interbank Market News Scan as of 3:01 pm AST; foreign exchange, interbank

11 July 2021

Links to follow ….

Interbank. Biden issues executive order addressing bank mergers, competition. Executive Order on Promoting Competition in the American Economy | The White House

Foreign exchange. The first country to get hit by the pandemic has become the first global economy to stumble as the world begins to heal, pushing investors to reconsider where China fits on the old-fashioned continuum of emerging and developed markets. China’s Easing Forces Traders to Rethink How They Label Markets – Bloomberg

Federal Reserve Bank of New York. The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its corporate bond holdings on July 12, 2021. The New York Fed also released an updated set of Frequently Asked Questions regarding the sales of these assets. New York Fed Announces the Start of Secondary Market Corporate Credit Facility Corporate Bond Sales on July 12 – FEDERAL RESERVE BANK of NEW YORK

Exchange rates of interest as of 3:00 pm AST

Currency pairExchange rate
USD/XCDXCD 2.70
USD/MXNMXN 19.8440
USD/JMDJMD 149.3260
USD/DOPDOP 56.7350
USD/HTGHTG 92.2640
USD/NGNNGN 409.5000
USD/GHSGHS 5.8993
USD/INRINR 74.3350
Source: OANDA

Interbank Market News Scan: Libor coming to an end. China’s RMB hopes to take out the dollar …

9 July 2021

Foreign exchange rates of interest …

Currency pairExchange rate
USD/XCDXCD 2.70
USD/MXNMXN 20.0188
USD/JMDJMD 148.6230
USD/DOPDOP 56.6164
USD/HTGHTG 92.0194
USD/NGNNGN 411.2120
USD/GHSGHS 5.9153
Source: OANDA

News links of interest …

Interbank. With the end near for the London Interbank Offered Rate (Libor), the Reserve Bank of India (RBI) on Thursday told banks and other financial institutions to stop using the benchmark as soon as possible and mandatorily by December 31 and move to any Alternative Reference Rates (ARR). https://www.business-standard.com/article/finance/rbi-to-banks-phase-out-libor-soon-move-to-alternative-reference-rates-121070900016_1.html

Interbank. The booming collateralized loan obligation market faces a chaotic end to 2021, when the benchmark London interbank offered rate is retired for new loan contracts. https://www.bloomberg.com/news/articles/2021-07-08/growing-clo-market-has-a-libor-transition-problem-on-horizon?sref=oriheOus Interbank. Sri Lanka’s central bank said it will dip into its foreign exchange reserves to partly repay $1 billion of bonds maturing later this month, seeking to allay investors’ concern about a possible default. https://www.bloomberg.com/news/articles/2021-07-08/sri-lanka-keeps-rate-on-hold-as-focus-shifts-to-debt-repayment?sref=oriheOus

Foreign exchange, China. The following are the central parity rates of the Chinese currency renminbi, or the yuan, against 24 major currencies announced on Friday by the China Foreign Exchange Trade System: Market exchange rates in China — July 9 – Xinhua | English.news.cn (xinhuanet.com)

Foreign exchange. Could the RMB dislodge the dollar as the world’s reserve currency. Could the RMB Dislodge the Dollar As a Reserve Currency? – BRINK – Conversations and Insights on Global Business (brinknews.com)

Cryptocurrency.  Why China wants to undermine Bitcoin. Currency and control: why China wants to undermine bitcoin (msn.com)

Cryptocurrency.  The future is far from stateless. Cryptocurrencies’ dream of escaping the global financial system is crumbling | Quinn Slobodian | The Guardian

Interbank Market News Scan: Federal Reserve releases minutes; New York Fed unwinds corporate bonds.

Interbank. At the end of 2021, most term loans, lines of credit or other debt instruments with variable interest provisions tied to the London Interbank Offered Rate (LIBOR) will need to switch to an alternative benchmark. https://www.telegraphherald.com/magazine-websites/biztimes/finance/article_eb0ab61c-9dfb-5dab-a4d8-30d4713f1c39.html

Interbank. China’s government bonds rallied, sending the benchmark 10-year yield to the lowest level since August, after the government indicated that the central bank could loosen its policy to support the economy. https://www.bloomberg.com/news/articles/2021-07-08/china-s-traders-race-to-buy-bonds-on-policy-easing-signals?sref=oriheOus

Interbank.  Here’s what went wrong with LIBOR. https://www.bloomberg.com/news/videos/2021-06-29/here-s-what-went-wrong-with-libor-video?sref=oriheOus

Interbank. Only half of loan investors believe their instruments have robust fallback language designed to ensure a smooth transition from the London interbank offered rate, according to a recent survey from Barclays Plc. https://www.bloomberg.com/news/articles/2021-06-25/libor-fears-persist-for-loan-market-with-six-months-to-deadline?sref=oriheOus

Interbank. A key gauge of funding conditions in Europe suggests money markets are pricing in an eventual end to the region’s unprecedented liquidity glut. https://www.bloomberg.com/news/articles/2021-07-02/europe-s-money-markets-prepare-for-world-without-unlimited-cash?sref=oriheOus

Interbank. Look for dollar strength into 2022. https://www.bloomberg.com/news/videos/2021-07-08/look-for-dollar-strength-into-2022-ubs-global-wm-s-schnider-video?sref=oriheOus

Board of Governors of the Federal Reserve.  Minutes of the Federal Reserve Open Market Committee. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20210616.pdf

Federal Reserve Bank of New York. The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its corporate bond holdings on July 12, 2021. https://www.newyorkfed.org/newsevents/news/markets/2021/20210708

8 July 2021