Monday, 21 October 2013

U.S. Money, Credit & Treasuries Review (as of 2 October 2013)

The U.S. monetary base increased 0.41% for the bi-weekly period ending 2 October 2013 to hit USD 3.5212 trillion according to the most recent monetary statistics released by FRED.

As the QE programme is still in place, the monetary base will continue to increase by about USD 85 billion on a monthly basis util the Fed decides otherwise.
As I've written previously in this report prior to the Fed's decision not to taper on 18 September (e.g. here), there are good reasons to expect QE to continue unaltered for the foreseeable future. One reason for this is that it will be difficult for the U.S. government to increase its debt without the Fed being the marginal buyer of treasuries as interest rates would likely increase significantly. Furthermore, an increase in interest rates would likely derail the equity bull market and pop the bond bubble - the Fed would be hard pushed to end the stimulus and hence this party especially as unemployment remains high, "growth" as measured by GDP remains low and the CPI remains low by Fed standards. Simply put, if the Fed tapers, it would become apparent for all to see that the Fed has been unsuccessful in turning the real economy around (of course, real economists knew the Fed's attempt to centrally plan and stimulate the economy towards sustainable and healthy growth was doomed from the start). Chances are the Fed will not allow such an outcome.

In addition, the growth rates in bank credit and loans are rapidly approaching zero. Should the Fed decide to taper, banks would probably become even more reluctant to lend even though almost 18% of their assets consist of cash (here). A continued drop in bank credit growth is probably the last thing politicians and the Fed would like to see as it would negatively affect GDP growth in the short term. In addition, to keep the money supply growing sufficiently (at a rate perhaps in line with historical rates), and this is crucial, the Fed has to continue monetizing government debt as the banks don't create enough money through lending these days.

In fact, if anything, the above indicate there is a higher probability the Fed's asset purchases will increase rather than decrease (taper) in the future. The U.S. equity market could very well be betting on such an outcome.
All the money supply measures continue to grow significantly, but the year on year (YoY) growth rates for M1 and M2 continue to decelerate. This slowing in growth can at least partially be explained by the plummeting of bank credit and the significant reduction in the growth rate in loans & leases for most of this year.

The YoY growth rates in the broadest measures of money supply in this report, the MZM and the M2+IMF+LTD*, have declined somewhat it recent weeks, but have remained more stable than the M1 and M2.

Bank credit tumbled to the lowest YoY growth rate since 16 November 2011 having dropped from 6.01% at the end of last year to the current 1.70%. At USD 10.0025 trillion, bank credit has now declined 0.37% since the end of last year.

Loans & leases in bank credit declined slightly on two weeks ago. The YoY growth rate of 2.43%, though slightly up from four weeks ago, is the lowest reported since 14 December 2011. Compared to the end of last year, it has increased only marginally (0.56%).

Compared to two weeks ago, the 1-year treasury yield increased 1 basis points while the 10-year declined 5 basis points resulting in a narrowing of the spread between the two of 6 basis points. Since 13 September the 10-year yield has declined 33 basis points driven by the Fed decision not to taper. Both the 10-year yield and the spread remain considerably higher than one year ago having increased 83 and 87 basis points, respectively.

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