Thursday 4 April 2019

Cross currents into Trump's 2020 relection bid

By the end of Sept 2020 bank excess reserves at the current pace of QE unwind will be circa $825bn, down from $2.6Tn at the peak. This has to be bearish asset prices from a crowding out standpoint and reverse portfolio channel effect

The thing about the excess reserves staying at say $500bn to $1tn is it allows the velocity of money to increase if we enter a wage/ inflation/ investment cycle, while at the same time QE unwind is negative for risky asset valuations

So what if after some industrial weakness in Q2, Trumps main street/ fiscal deficit policies are stoking a wage/ inflation/ investment cycle, the Fed is trapped as it will still be tightening for asset markets but still loose for real economy.

2020 in that scenario will see rate hikes restarted but Fed will be behind the curve so USD weak All this going into Trump's reelection will be immense pressure on Powell to stay loose Trump's history is one of spending big upfront, not getting revenues later, and then bankruptcy

Nevertheless, in the short term the Fed/ China stim/ US-China trade deal rally since December is running out of steam and up against slowing data. Q2 could see risk off and bond rally more first BB spreads look to have fully recovered and gone sideways for a month now.

A collapse in oil prices as the US goes to net exports ends the Petrodollar and puts sovereign wealth funds into the structural USD/ TSY seller

There is almost 6MMbpd of oil production capacity in DUC wells waiting for new export pipelines by end 2020 before starting production