To The Moon

On Wednesday, Federal Reserve officially announced that funding support created for banks last year, the Bank Term Funding Program (BTFP), which was for response to the potential financial crisis caused by the collapse of Silicon Valley Bank, will be terminated as planned in March 2024.

Banks can continue to get new loans until March 11 under this program, but the interest rate would not be lower than the reserve rate on the day of the loan.

Fed Bank Term Funding Program (BTFP) Usage Is At Record High

Because of the increased arbitrage opportunities resulting from the decline in BTFP borrowing costs, and this cause a significant increase in BTFP usage in recent times. Due to these factors, Fed make the decision that the program will terminated as planned in March.

According to data from the Fed, outstanding loans as of January 17 totaled $161.5 billion. Furthermore, the average weekly increase over the past six weeks amounted to nearly $5.6 billion, representing the largest weekly surge since the beginning of May.

Liquidity Pressure And the Pace of Exiting QT

The reason why Fed has to expand its balance sheet and provided bank liquidity through the BTFP is because of the crisis in US small and midsize banks.

A significant amount of liquidity would be withdrawn when the BTFP program ended in March 2024. An estimated of $150 billion of liquidity would be removed in March. We have to consider other signals that may indicate that current liquidity may be under pressure.

Exhaustion of the RRP facility

The overall balance sheet size of the Fed has declined from a peak of just shy of $9 trillion in mid-2022 to its current size of $7.7 trillion. The Overnight RRP has declined significantly, as liquidity pressure mounts, ending the balance sheet runoff sooner rather than later could alleviate some of the market's concerns and prevent a repeat of the 2019 “money crunch” crisis.

Occasional Spikes In Repo Rates

A spike in the price for repurchase agreements, or repos, in which investors borrow against Treasury and other collateral, can be a sign that cash is getting scarce in a key funding market for Wall Street.

As we can see occasional spikes, this suggest that a price signal of liquidity stress.

Prominent Imbalance In Bank Reserves

As we can see that the imbalance in bank reserves is getting more prominent. It might struggle to meet its short-term obligations, leading to liquidity problems.

Can We See Fed Implement Rate Cut Sooner?

In order to avoid a liquidity crisis, investors are eager for the Fed to take preemptive action to lower interest rates. After the Fed's decision to terminate the BTFP, the expectations for a rate cut have slightly intensified.

According to the latest data, the probability of at least 25bp rate cut in May has increased by 3.74bp to 90.92% from the previous day's 87.18%.

However, the pace of interest rate cuts is being hampered by the strong performance of the US economy and the robust fundamentals recently.

Over the past one month, hard economic data has supported the thesis of "soft landing", with December retail sales showing consumer spending finished 2023 in a better position than many economists worried. Building permits rose by more than expected in December, too.

The labor market has demonstrated its resilience, as evidenced by the latest jobless claims data which showed the lowest level since September 2022.

The latest S&P global flash US composite PMI came in at 52.3 in January, up from 50.9 in December and better than expectation by economists, again underscoring how the soft landing scenario could be within reach.

Significant Impact From Quantitative easing (QE) On Stock Market

Quantitative easing (QE) can have significant impacts on the stock market, although the exact effects can vary depending on various factors including market conditions, investor sentiment, and the specific implementation of QE by central banks. Here are some typical impacts:

Stock Prices Rise: QE typically injects liquidity into the financial system, which can lead to increased demand for stocks as investors seek higher returns than those offered by fixed-income securities. This increased demand can push stock prices higher.

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Lower Interest Rates: QE often involves central banks purchasing government bonds and other securities, which drives up their prices and lowers their yields. This tends to push investors towards riskier assets like stocks in search of higher returns, further boosting stock prices.

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Increased Risk Appetite: With interest rates artificially suppressed by QE, investors may be more inclined to take on risk in search of higher yields. This can contribute to increased buying activity in the stock market.

Wealth Effect: Rising stock prices due to QE can create a wealth effect, where investors feel wealthier and thus more willing to spend, which can stimulate economic growth and further support stock prices.

Stimulus for Corporate Investment: Lower borrowing costs resulting from QE can incentivize corporations to invest in expansion and capital projects, potentially driving corporate earnings and supporting stock prices.

Currency Depreciation: QE measures can sometimes lead to currency depreciation as central banks expand their balance sheets. A weaker currency can benefit export-oriented companies, which may positively impact their stock prices.

Market Sentiment: QE can also influence investor sentiment. If investors perceive QE as a sign of central bank support for the economy, it can boost confidence and lead to increased buying activity in the stock market.

Summary

While there might be a possibility of imminent QE and rate cut happening by May 2024, we should also consider the current market condition, as we can see from the recent economic data, economy is still strong, and what Fed will do next, might be to keep inflation as it is first.

Inflationary pressures, asset bubbles, and distortions in financial markets are something we need to be cautious about when trading with QE and rate cut.

Appreciate if you could share your thoughts in the comment section whether you think QE and rate cut would benefit the market by increasing market sentiment and rise in stock prices?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.

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