Monday, 24 June 2013

U.S. Money, Credit & Treasuries Review (as of 12 June 2013)

The U.S. Monetary Base ("Base Money") hit USD 3.2355 trillion for the bi-weekly period ending 12 June, up USD 56.4 billion (1.8%) from two weeks ago. The FOMC announced last week that it will
"...continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month"
so the monetary base will continue to expand for a while yet even though there is much talk of the so-called "tapering"

The vast purchases of assets by the Fed has not resulted in a similar expansion in the broader measures of money supply however as banks are simply placing most of the cash proceeds as excess reserves with the Fed instead of lending it (at least partly explained by stricter capital requirements based on Basel III). As a result, the M2 money supply, although still increasing rapidly on a year on year (YoY) basis, is currently lower than the all-time high from some weeks back and the YoY growth rate has certainly been slowing down as we've pointed out before (e.g. see here). The M1, MZM and M2+IMF+LTD money supply measures all remain lower than the all-time highs set a few weeks back. 

Bank Credit outstanding also remain lower than all-time high and at 3.5% is currently growing at almost half the average YoY growth rate of 6.5% since 1985 and the lowest since the bi-weekly period ending 25 January 2011. 

The most interesting development during the last two weeks was the continued increase in the 10-Year treasury yield. Having increased by 17 basis points (bp) for the bi-weekly period ending two weeks ago, it increased another 15 bp during the last two weeks. During the course of just four weeks the yield has therefore increased 32 bp and is currently 56 bp higher than one year ago. As the 1-Year treasury yield has not changed much, the spread between the two has increased by 60 bp during the last year resulting in a steepening of the yield curve

The combination of a richly valued stock market, the slowing down in money supply growth rates and bank credit as pointed out in this report and Bernanke hinting on slowing down Fed's asset purchase program, has not been good for the U.S. stock market in June as the S&P 500 index has dropped 3.75% since 31 May.

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