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Macroeconomic & Geopolitical

Geopolitics, Liquidity & Central Banks Take Center Stage

20 September 2019 - 4 min read

The three things you need to know this week: Saudi drone strike takes out five percent of global crude output, repo markets sneeze and the Fed cuts rates.

Overview

Global Growth: The OECD lowered its 2019 global growth forecast again in September, to 2.9% from 3.2%, after downgrading the growth outlook four months ago. The 2020 growth forecast was lowered to 3% from 3.4%. The OECD argued weaker growth prospects reflect escalating trade policy tensions that are taking a toll on confidence and investment, adding to policy uncertainty and weighing on risk sentiment in financial markets. While monetary policy is expected to remain accommodative in advanced economies, the OECD called for more fiscal policy support.

Repo Squeeze: A scarcity of cash caused overnight repo levels to spike earlier in the week. While elevated overnight repo levels typically occur near quarter-end or year-end when dealer balance sheets are constrained, there were a confluence of events this week that led to the volatility. The main drivers were a corporate tax payment whereby money market investments that matured on the day the taxes were due were liquidated to pay the tax bill and not reinvested. At the same time, a significant amount of new issue Treasuries settled requiring cash to fund the purchases. The combined effect was a scarcity of cash in the system, which caused repo rates to spike. The Fed responded by injecting liquidity into the system and lowering the IOER and overnight repurchase rate by 30 bps at the Wednesday FOMC meeting to alleviate money-market strains.

FOMC Meeting: The Fed cut the funds rate by 25 bps to a range of 1.75%—2.00%, as expected. The policy statement was little changed, although the vote was 7⁠—3 to lower rates, with two members preferring no cut and one member seeking a 50 bps cut. The updated dot plot shows no further rate cuts for 2019 and 2020. Despite concern about the growth outlook, the median GDP projection for 2019 increased .1 to 2.2%, while the inflation target of 2% is not expected to be reached until 2021. The tone of the press conference was not as dovish as the market wanted, but Fed Chairman Jerome Powell said more extensive cuts may be needed if the economy weakens.

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