Reserves at Fed Sink Below $3 Trillion to the Lowest Since 2020

Central Bank

Summary:

The US banking system’s reserves, a key factor in the Federal Reserve’s decision to keep shrinking its balance sheet, tumbled below $3 trillion to the lowest since October 2020.

Reserves at Fed Sink Below $3 Trillion to the Lowest Since 2020_1

Bank reserves fell by about $326 billion in the week through Jan. 1 to $2.89 trillion, according to Fed data released on Thursday. That’s the largest weekly slide in over two-and—a-half years.

The decline comes as year-end dynamics force banks to pare balance-sheet intensive activities like repurchase agreement transactions in order to shore up their books for regulatory purposes. That means cash is directed to places like the central bank’s overnight reverse repo facility, draining liquidity from other liabilities on the Fed’s ledger. Balances at RRP swelled by $375 billion between Dec. 20 and Dec. 31 before falling by $234 billion on Thursday.

As the same time, the Fed has also been removing excess cash from the financial system through its quantitative tightening program, just as institutions continue to repay loans from the Bank Term Funding Program.

With US policymakers continuing QT, Wall Street strategists have been paying close attention to the lowest comfortable level of reserves — which some have estimated between $3 trillion and $3.25 trillion, including a buffer. Policymakers said at last month’s gathering it was continuing to shrink its balance sheet.

It also adjusted the offering rate on the RRP facility so that it’s in line with the bottom of the target range for the fed funds rate. That put downward pressure on short-term interest rates and some think that it could be enough to stave off reserve scarcity for a little bit longer.

Still, the debate is picking up over how much longer the Fed can keep up QT without evoking memories of September 2019. At the time, reserves had grown too scarce while the Fed was unwinding its balance sheet and a shortage led to a surge in a key lending rate and the federal funds rate. The central bank was forced to intervene to stabilize the market.

While the central bank in June lowered the cap for how much in Treasuries it will allow to mature without being reinvested, it’s unclear when the program will end altogether.

The recent reinstatement of the debt ceiling is likely going to make it more difficult for policymakers to judge that ideal level as the measures Treasury will take to remain under the cap tend to artificially add liquidity to the financial system and mask indicators of reserve scarcity. Two-thirds of respondents to the New York Fed’s Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants expect QT to end in the first or second quarter of 2025.

Source:Bloomberg News

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Alex

Forex

Economic

Pound to Dollar Rate 2025 Outlook: All Eyes on Washington_1

There is a consensus that US policies will help keep the dollar firm early in 2025.

The domestic and global consequences of Trump’s policies will be a key GBP/USD element this year.

On the US side, UBS is not convinced that economic strength will be sustained and expects GBP/USD gains; “For growth, we see downside to that number given the expected decrease in government consumption and as elevated real rates weigh on gross fixed capital formation. So the two cuts the market is pricing for 2025 may prove too few.”

It is one of the few bullish investment banks and forecasts that GBP/USD will strengthen to 1.34 at the end of 2024.

ING sees scope for initial Pound resilience, but expects a more aggressive Bank of England policy will weaken the Pound later in the year with GBP/USD ending the year at 1.24.

Danske Bank expects sustained dollar support during the year with GBP/USD ending the year at 1.22.

There is a high degree of uncertainty, especially surrounding the impact of US Administration policies under President Trump.

UBS notes the risk of elevated volatility and more extreme developments; “US President-elect Trump’s stated aim of aggressively taxing US consumers via tariffs is an example. Markets are not pricing in the inflation and growth consequences of policy pledges becoming reality, and assume dilution. The shift in immigration policy from Trump’s advisor Musk can be cited as a parallel—economic reality tempering political rhetoric.”

There are also multiple geo-political uncertainties including the Russia/Ukraine developments and the Middle East while the Chinese outlook remains a key global uncertainty.

UBS added; “Investors’ assumption that economic reality will limit political extremes is evident elsewhere— China and Germany, for example. As polarization reduces the middle ground, it is inevitable that markets have to pick a side rather than a compromise. But if markets pick the wrong side, the economic fallout will be more dramatic.”

The imposition of US tariffs and the reaction, especially for China, could trigger global currency wars and a slide in risk appetite, both of which would have major implications for the Pound.

In this context, investment bank projections for major currencies are relatively narrow and there will be an important risk of much more substantial moves during the year.

ING expects near-term Pound resilience; “The steady increase in US trade tariffs through 2025 stands to weigh on the currencies of the smaller, open economies and the commodity producers. The outperformers in the G10 space (within a broadly stronger dollar environment) will be the undervalued Japanese yen and – for the first quarter – probably sterling, too.”

Bank of England (BoE) policies will also be very important for the Pound.

There is a consensus that the BoE will cut rates at the February meeting. Markets are, however, only pricing in two full cuts for the year.

ING expects the BoE will shift to a more aggressive stance later in the year; “We think that softer UK services data will not emerge until February, suggesting GBP/USD may hold onto gains until then. But ING’s house view is for quite aggressive BoE rate cuts in 2025 – taking the policy rate 150bp lower to 3.25%. Hence our view for some modest GBP/USD downside later next year.”

Guillaume Derrien, senior eurozone economist at BNP Paribas is cautious over the UK outlook, “Although the UK economy is facing significant wage pressures, economic activity is significantly less dynamic than in the US.”

MUFG added; "If we were to see the economy in the UK continue to weaken early this year, and the Bank of England started to make noises about potentially being more active in terms of cutting rates in response to that, that could certainly open the door for a weaker pound.”

Derrien added; “Between an ECB whose rate cuts will, admittedly, be gradual but steady, and a US Federal Reserve that is now more hawkish, the Bank of England will be in an intermediate position in 2025, with four rate cuts expected.”

In its December 2024, statement, the Bank of England made reference to uncertainties and vulnerabilities surrounding tariffs and the global economy.

It commented; “Indicators of trade policy uncertainty had increased materially, but that the magnitude and the direction of the impact of any such policies on UK inflation was at present unclear. These effects might not be apparent for some time.”

US Administration policies will be a key short-term focus with expectations of tax cuts and tariffs.

MUFG examined the historical context; “The price action for the dollar index has been similar so far to following the first US election victory for Donald Trump at the end of 2016 when it also increased by just over 5%. On that occasion the dollar index peaked right at the start of Trump’s first year in power on 3rd January 2017 before trending lower throughout the first nine months of the year.”

The bank does not expect a repeat of the 2017 price action.

It notes that the global economy strengthened in 2017 which helped underpin global currencies. MUFG, however, does not expect a repeat this time round with the global economy generally struggling and preventing currencies making headway.

MUFG also expects that the Trump Administration will be much more proactive in imposing tariffs.

It commented; “While we don’t expect 25% tariffs to imposed on all goods imported from Canada and Mexico, it is likely that tariffs will be hiked by a further 10% on imports from China. More front-loaded tariff hikes support our forecast for the US dollar to strengthen further during the first half of this year.

RBC expects a more moderate stance; “A very heavy hand on tariffs right off the bat would certainly be U.S. dollar positive, but we expect a more conciliatory tone, in the way that those tariffs are implemented in perhaps a more staged way in order to extract as much as possible in negotiations with trading partners.”

There will certainly be concerns that tariffs will undermine global economies.

Upward pressure on domestic prices would also encourage the Federal Reserve to maintain a hawkish stance and resist further interest rate cuts, at least in the short term.

The Fed cut interest rates to 4.50% in December, but there was a hawkish statement. Markets are not expecting a further cut in January and only pricing in two cuts for the year.

MUFG also expects the hawkish Federal Reserve policy stance will underpin the US currency.

RBC Capital Markets differentiates between different time frames; “We've pushed back our expectation for when that U.S. dollar weakness might materialize. But we do expect the U.S. dollar to weaken in the longer term, because a lot of the factors that we monitor still argue in that direction. You've got the U.S. dollar, that is still very overvalued on most models.”

The bank pointed out long-term structural negative factors for the US currency; “We have U.S. trade and fiscal deficits that are quite large and expected to continue for the foreseeable future. And we've got countries starting to shift away from using the U.S. dollar.”

Scotiabank still expects GBP/USD to be held to 1.24 at the end of 2025 before gains in 2026.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

ING

Economic

THINK Ahead in developed markets

The first jobs report of the year comes next Friday (January 10). The early consensus is for December non-farm payrolls to have risen 153k with a range of 125k to 200k, but expectations will be firmed up through the week with the release of job openings numbers, ADP private payrolls and the ISM employment components. The unemployment rate is expected to hold at 4.2%, while wage growth is expected to hold at 4% year-on-year. This would all be consistent with the general cooling of the jobs market, but after 100bp of Fed rate cuts in 2024, the widely held view is that we will see a much slower and less aggressive series of moves in 2025.

The Federal Reserve dot plot update from the December FOMC meeting suggested the central forecast amongst officials is for only two 25bp cuts in 2025. Just 3bp is priced for the 29 January FOMC meeting with 15bp priced by March. We certainly agree with a no-change outcome later this month but are still projecting a 25bp cut in March. While the Fed has been cutting the policy rate, longer-dated borrowing costs have surged higher on a combination of government debt sustainability concerns and potentially sticky inflation. The dramatic steepening of the yield curve is pushing mortgage rates and corporate borrowing costs sharply higher. The dollar has also risen to its strongest level in more than two years against key trading partners and these two factors will act as a brake on economic activity that the Fed may feel it needs to offset.

Source:ING

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Alex

Economic

Manufacturers in the UK have cut back output at the fastest rate in 11 months, compounding the gloomy picture for the British economy, according to a closely watched survey.

The purchasing managers’ index (PMI) for manufacturing fell in December to 47, down from 48 in November – its weakest reading since February. Any reading below 50 signals a contraction.

Sterling fell on foreign exchange markets after the news, underlining the challenge facing the Labour government, as it hopes for an economic upturn.

The pound was down almost 1% against the dollar by mid-afternoon in London, at $1.24 – the lowest since last April. The dollar has strengthened more broadly in recent weeks, ahead of Donald Trump’s arrival in the White House.

S&P Global Market Intelligence, the data company that compiles the PMI, blamed government policy for the manufacturing squeeze.

Rob Dobson, a director at S&P Global, said: “Manufacturers are facing an increasingly downbeat backdrop. Business sentiment is now at its lowest for two years, as the new government’s rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike.”

He added that small- and medium-sized companies were being hit hardest. The survey showed that staffing levels were being cut back at their fastest rate since February.

Businesses are facing higher tax bills from April, after the chancellor, Rachel Reeves, announced an increase in employers’ national insurance contributions (NICs) to fund public services.

The NICs increase, which is projected to raise £25bn by the end of this parliament, will coincide with a rise in the “national living wage” of almost 7%, to £12.21 an hour for those aged 21 and over.

“Some companies are acting now to restructure operations in advance of the rises in employer national insurance and minimum wage levels in 2025,” Dobson said.

Labour came to power at July’s general election promising to fix the foundations of the economy and produce the strongest sustained growth among G7 countries.

With little evidence of improvement, Keir Starmer has more recently switched the focus to improving living standards. In his new year message, the prime minister said voters would see “more cash in your pocket”.

The economy had already been expected to slow in the second half of last year, as the Bank of England kept interest rates high to tackle inflation. Uncertainty over the impact of Trump’s re-election is also likely to have compounded the pessimistic mood.

Revisions to gross domestic product figures published by the Office for National Statistics in late December showed the economy flatlined in the third quarter of 2024. The Bank expects GDP to have stagnated in the final three months of the year, too.

The combination of weak GDP and strong wage increases has sparked fears that the UK may be sliding into stagflation – weak economic growth and rapidly rising prices. This would present a tough challenge for policymakers.

The Bank’s nine-member monetary policy committee (MPC) reduced interest rates to 4.75% in November, with policymakers expected to monitor the impact of the NICs increase closely.

Business groups responded with dismay to Reeves’s budget package of tax increases – and some have called on Labour to water down plans for stronger workers’ rights.

The Confederation of British Industry said in December that the economy was “headed for the worst of all worlds”, projecting a “steep” decline in activity in the first quarter of this year.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Central Bank

Forex

China Lets Yuan Weaken After Defending 7.3 Per Dollar for Weeks_1

The yuan breached the psychological milestone of 7.3 per dollar for the first time since late 2023, amid concerns over China’s economic struggles and a widening bond yield discount to the US. The move came even as the central bank maintained its support for the currency with its daily reference rate on Friday.

The break may signal that the People’s Bank of China is looking to accommodate mounting growth pressures through a weaker currency after holding it almost unchanged for more than two weeks. As a result of Beijing’s control, the yuan climbed to the highest since 2022 versus trading partners’ exchange rates — a move that may undermine the nation’s export competitiveness.

The break of 7.3 “in a way is inevitable with continued dollar strength and the relentless fall in domestic government bond yields,” said Wee Khoon Chong, senior APAC market strategist at BNY. “Risk for dollar-yuan remains on the upside.”

The onshore yuan slid as much as 0.3% to 7.3190 on Friday before paring the move. A drop past 7.3510 per dollar would take the currency to its weakest level since 2007.

The decline has hurt sentiment in other emerging markets, with the Taiwan dollar declining to the weakest level since 2016 and the won erasing earlier gains.

Chinese state banks had briefly stepped away from selling the dollar at around 7.3 in the afternoon, spurring investors to send the yuan weaker than that level, according to traders. The lenders resumed selling the greenback at around 7.31, said the traders, who asked not to be identified as the matter was private.

Looking ahead, China’s economic fundamentals point to further depreciation. Risk sentiment is so poor that the benchmark stock index just closed at the weakest level since September and sovereign yields hit fresh record lows. US President-elect Donald Trump had also threatened to impose tariffs on Chinese exports.

In November, the country already suffered the biggest outflow on record from its financial markets.

Adopting a rigid FX strategy by drawing a red line is controversial, as artificial stability in the market may lead to outbursts of volatility in the future. In August 2015, the PBOC’s surprise move to allow the yuan to weaken after holding it little changed at 6.2 for months led to massive capital outflows and a panic selloff of Chinese assets.

Strategists at BNP Paribas SA see the yuan falling to 7.45 by the end of 2025, while Nomura forecast in December the currency may drop to 7.6 in overseas trading by May. JPMorgan Chase & Co. expects the offshore yuan to weaken to 7.5 in the second quarter.

“Once 7.3 is gone, I doubt there are many speed bumps along the way,” said Mingze Wu, currency trader at Stonex Financial Pte Ltd. “It’s likely market is just a bit shell-shocked and wondering what to do — it’s like a dog finally caught its own tail.”

Still, the PBOC may not allow a rapid and disorderly decline as that may lead to financial instability. It can still use its fixing — which confines the currency’s trading onshore to a 2% range on either side — to guide expectations, after keeping it at levels stronger than 7.2 for months.

Other tools at PBOC’s disposal include mopping up yuan liquidity in offshore trading and direct intervention in the FX market.

“Going forward, a calibrated yuan adjustment is more likely than an abrupt change,” said Wei Liang Chang, a strategist with DBS Bank Ltd. “Policymakers would likely seek to keep yuan depreciation expectations in check to avoid denting Asian risk sentiment.”

Source:Bloomberg News

Risk Warnings and Disclaimers

Add to Favorites

TD Securities

Economic

U.S. Deficits: Can You Take Me Higher?

The coming U.S. budget debate is likely to be contentious as it balances various interests. We expect deficits to continue to rise for several reasons:

Trump victory: The Republican wave is likely to keep deficits rising amid the renewal of the 2017 tax cuts, which would add a further US$4-5 trillion to current Congressional Budget Office baseline projections over the next decade.Interest expense continues to rise: The Treasury paid nearly US$1 trillion of interest in FY2024. Even if interest rates remain near current levels, the debt burden is set to rise significantly over time. Interest expense as a portion of GDP has reached 3.9% and is likely to continue climbing further.Decline in discretionary outlays: The share of discretionary outlays as a portion of total deficits has declined to just 25% of the total budget in recent years. Higher interest expenses reduce discretionary outlays even further. This will make reducing deficits even more difficult in the coming years as changing entitlement spending has been a no-go zone for politicians.

Tariffs by the Dozen

There’s no certainty about what President Trump will do on the tariffs front, despite his proclamations. We can read his “Truths,” and we can make assumptions about how literal he is, but ultimately, it’s more useful to have a framework and rules-of-thumb that can be adapted as policy develops. On that front, we can assume the following temporary impact on US headline inflation from tariffs:

60% tariffs on China boost inflation by 0.7ppts after a year10% tariffs on countries outside Canada/Mexico/China boost inflation by 0.5ppts after a year25% tariffs on Mexico and Canada combined boost inflation by 0.6ppts after a year.

China: He Said, Xi Said

It's clear that the U.S. and China have no love lost between them. That said, China is perhaps the one country most likely to strike a deal with Trump. The country is still unlikely to avoid sharp tariffs, and we expect retaliation from China once the U.S. tariffs are in place. This could include restrictions on exports of rare earth commodities or components used in the energy industry; in other words, narrow categories that could inflict sharp pain in strategic industries. However, the overall impact of trade restrictions that China can impose in the U.S. is likely to be fairly minimal and not of broad economic significance.

Europe: Stuck in the Middle With EU

The European Union (EU) is more likely to get caught in the crossfire between the U.S. and China. The EU-US relationship has been rigid under President Biden, so Trump may still be welcomed cautiously, simply because he moves the dial. The EU has faced evasive and shifting priorities when negotiating with the U.S. causing it to shift its focus towards China. This is going to cause problems for the U.S., who may insist on changes to the EU-China relationship in any negotiations. This will frustrate the EU, who sees China as a source of cheap green technology that can help the region achieve its green goals as well as a large market for its manufacturing sector.

Global Markets: Welcome to the Jungle

Turning to markets, what does this all mean? As we end 2024, U.S. yields have remained anchored to data, yet equity gains seem to have stretched that relationship. The next year marks a transition from pure data dependence to policy dependence. Don't be fooled; policy dependence augments – not replaces – data dependence. The monthly correlation of U.S. Treasury yields to U.S. surprises during Trump's first term was 0.6 (or 0.8 if we exclude the pandemic-impacted 2020) compared to the 20y average of 0.4. Markets will be driven first by the expected impact of policy plans, then by the actual impact of delivery.

Source：TD Securities

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

JPMorgan

Economic

Growth

According to the second estimate, the U.S. economy expanded at a solid 3.1% saar, notching a second consecutive quarter of above trend growth. Consumer spending continued to power the economy forward, rising 3.7%, while government spending also looked strong. Business fixed investment rose 4.0% while residential investment remained a drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 10.7% and weighed on growth. Overall, despite concerns about the labor market and the manufacturing sector, the U.S. economy remains solid.

Jobs

After strikes and hurricanes disrupted labor market activity last month, the November Jobs report showed a rebound in hiring. Nonfarm payrolls rose by 227K, beating expectations, while upward revisions added 56K jobs to the prior two months. The private sector accounted for 85% of this month’s job growth with health care and leisure and hospitality adding 72K and 53K jobs, respectively. Elsewhere, wages rose 0.4% m/m and 4.0% y/y, while the unemployment rate ticked higher to 4.2%. Overall, the labor market still looks solid, although the stability in wages and uptick in the unemployment rate tilts the scales further toward a December rate cut.

Profits

3Q24 pro forma earnings per share (EPS) came in at $61.61, representing growth of 4.6% y/y and 1.8% q/q. Mega cap tech delivered another quarter of double digit earnings growth as did health care. Elsewhere, cyclical value sectors saw earnings fall. Moving forward, lower rates and regulatory uncertainty should provide a boost to manufacturing-tied sectors along with financials as management teams ramp up investment. This means less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.

Inflation

At the headline level, the November CPI report showed that progress on disinflation has stalled, although the underlying details suggest that positive progress is still being made. Headline CPI rose 0.3% m/m with base effects pushing the annual increase to 2.7%, while core inflation held steady at 0.3% m/m and 3.3% y/y. In the details, inflation appeared to be hottest in segments aligned with resilient mid-to-upper income consumption, including autos, travel and leisure and recreational services. Importantly, many of these segments are volatile and don’t appear to be on an upward trend. In more welcome news, shelter and auto insurance inflation eased, rising 0.3% and 0.1%, respectively. On the other hand, headline and core PCE came in just below expectations, rising 2.4% and 2.8% y/y, respectively. Overall, as base effects turn more favorable and core services disinflation continues, inflation should resume its steady descent back to 2%.

Rates

At its final meeting of 2024, the Federal Reserve voted to cut the federal funds rate by 25bps to a range of 4.25% to 4.5%. That said, statement language and the new Summary of Economic Projections (SEP) leaned hawkish. In acknowledgement of resilient economic growth, diminished downside risks to the labor market and slower progress on disinflation, the updated SEP showed a higher growth and lower unemployment forecast for 2025, and higher inflation forecasts for 2025 and 2026. Moreover, the committee penciled in just 2 rate cuts in 2025 vs. 4 in the September SEP. Importantly, a few members incorporated potential fiscal policies and tariffs into their estimates. That said, the pace of rate cuts, while likely to be more gradual, will continue to hinge on the data until we gain more clarity on President-elect Trump’s policy agenda.

Risks

Geopolitical tensions and policy uncertainty may heighten market volatility.A slow-moving economy is more vulnerable to any kind of shock.Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.