Looks like Summer is putting up one more last gasp before heading off into the sunset. Fall is upon us even though the temperatures are indicating otherwise. In MN the leaves are changing and falling already due to the very wet summer we have had. If the past is any indication, our fall will not be as brilliant in terms of colors as usual.
This past week the media appears to have hit the panic button on a specific news story. For most of this week the short term, overnight repurchase market went a bit wild. The major banks, 6 or 7 of them, ran short of liquidity and had to fund themselves with overnight repurchase funds. This has not been done since just before the great recession. The reason for the illiquidity then was certain markets locking up and major depositors pulling funds to provide liquidity when they could no longer get credit. This was not the case this time. In fact the Media made a big to do over the borrowing indicating that major corporations needed funds to pay quarterly taxes. The second excuse that was given was corporations were taking funds and buying Treasuries as a flight to safety. In the end neither reason was accurate. The treasury rates on all offerings did not move significantly in the past week. Therefore you can safely say a massive amount of funds did not go in that direction. Second, regarding the quarterly taxes, if that were the case you would see this kind of spike each quarter. In looking at the past two years, the only other time there was a spike in the overnight repo market was last December, and at that time the Fed did not step in to help fund the shortfall.
The actual cause for the amount of the short fall is the new reserve requirement on the larger banks. The Liquidity Coverage Ratio on larger banks requires them to hold larger amounts of liquidity now in the event of a major financial crisis. Had the liquidity levels been lower, like last December, the banks could have held off the need to borrow, like they were able to last December. The banking industry is and remains strong and is not in any trouble systemically. In fact with the new Liquidity Coverage Ratio the industry is well capitalized and reserved to meet the needs of the economy.
The numbers in the economy this week, covering the past month or so, came in much better than expectations. A bit of a surprise was the industrial production for August which was up .6%. After the ISM for August that should have been down. The industrial capacity for the US was also up, moving to 77.6. That is a good direction, but still well below the level that would require replacement or new equipment to be purchased. In the end, industry has quite a bit of runway to grow before any type of inflation or drop in productivity would occur due to much activity. Housing starts as well as building permits in August grew dramatically, mostly for multifamily projects. New mortgages were up as rates were falling in August. Overall the jump was nice to see. With the level of activity in August and now bleeding into September, the risk of a recession is abating. Last week I suggested maybe 2021, I stick to that estimate after seeing the numbers for this week.
The attack on the Saudi oil facility created a short term spike in prices which seems to have abated quickly. Supplies are ample to meet the demand that exists. The level of oil rigs in North America is declining down to 719 this week. Earlier this year it was as high as 778. However, production continues to be strong. Demand for oil and gas continues to be soft. This is due to more efficient/electric cars on the road but mostly due to world demand softening as economies are slowing overseas.
Overall the economy is moving along at a level at 2% or higher.