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FED Stealth Tightening
September 22 2016 ( From TradingView )

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As most of us were concerned by the Federal Reserve story on risk
that they hike rates on September 21, it was some relief by most
market participants that they didn t. The funny thing about the
FED Economic Projections is that they at a time they revised lower
their growth forecast on GDP but increased their projection higher
on the Federal Funds Rate with a low inflation outlook. Puzzling me!

But as few of us are aware that new rules from the Securities and
Exchange Commission (SEC) on Money Market Fund have already
a tremendous impact on some short term rates. The biggest
impact from those new rules have been less demand for short
term bank debt to short term US Treasury Bills or Bonds...

Bank debt rates are based on the London interbank offered rate
(commonly known as Libor); it is an interbank lending rate and is also
used as a short-term interest rate benchmark. Libor is a very popular benchmark and used as a reference rate on over $350 trillion securities worldwide. Just try to figure out one basis point change is worth $3.5 billion...

As shown by the first chart below, Libor rates have been rising more than the US Treasury Bills of same maturity (1month and 3 month showed). Obviously the first rise in December 2015 was the hike from the Federal Reserve but take note the rise from mid-summer 2016...

It it more obvious if we look at the spread between Libor rates ans US Treasury Bills as shown by the second chart below.

All that to say that in fact, US official monetary policy yesterday have been unchanged BUT the market pressure coming from regulations is in fact pricing a rate hike anyway!

And that pressure on short term rates (banks paper) is happening at a time when the seasonals are turning bearish on the mighy SP500 Index and when we have a tremendous divergence between the growth of St-Louis Monetary Base and the SP500 Index. (See thid chart below)

Read also:

SEC Adopts Money Market Fund Reform Rules

Libor rise, driven by U.S. money market rules, seen topping near 1.0 percent

LIBOR!

Louis Pasteur
"Chance favors the prepared mind."

FED Stealth Tightening #Trading #investing #rates #stocks #libor #fed

Libor rate 1 month ( blue )
Libor rate 3 month ( red )
US Treasury Bill yield 1 month ( magenta )
US Treasury Bill yield 3 month ( purple )

St-Louis Monetary Base (Billions of $ - Blue Line - Left Axis)
SP500 Index (Red Line - Right Axis)

Libor rate 1 month minus US Treasury Bill yield 1 month ( blue )
Libor rate 3 month minus US Treasury Bill yield 3 month ( red )

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