Tag: September

Federal Government Support Lift Asset Markets In September

The purpose of this article is to examine the USA sectoral flows for September 2020 and assess the likely impact on markets as we advance.

Source: FRED, CBO and author’s calculations based thereon

The table above shows the financial balance of financial flows from the USA national accounts since April this year when the Federal Government response to the COVID crisis started.

The flow to the private domestic sector (where the asset markets are) was over fifty percent lower than last month but still positive at over $79B.

Asset markets can be expected to keep climbing as the injection of more money is factored into their prices.

The chart below from the CBO shows the deficit spending path.

The chart above shows the big difference in deficit spending year over year. The CBO summarising the result for September as follows:

The table below shows that the overall Federal expenditures were large in September with a 19% increase from last month and a return to levels seen in May and June of this year. Higher overall spending lifts asset prices, and markets can rise even in the face of a pandemic and its associated unemployment and lower consumption and production levels.

The politicians may be arguing about more stimulus at the moment; however, the last stimulus package’s spending is still happening at crisis levels.

The table above, taken from the Daily Treasury statement, shows that the Federal government has a bank balance of over $1.6T available to spend. There is no shortage of cash on hand, and it is still going out at a strong level.

Very few tax dollars funded this bank balance. The bank balance came mostly from bond sales. Federal taxes to fund the government are obsolete.

The chart above is taken from this article from ANG traders of the Away from the Herd market service.

ANG Traders has very cleverly produced a chart that removes the treasury churn’s noise from the Daily Treasury Statements. This is the redemption and then the sale of bonds on a grand scale that tends to mask the actual real spending into or out of the economy. Once the churn has been removed, the chart shows only the real spending and whether the Federal government is adding money to the economy or taking it out.

The good news is that at present, the bias is towards a net add to financial assets.

Looking forward, the chart below shows the expected likely path of asset markets into the end of the calendar year.

The chart comes from Mr. Robert P. Balan of Predictive Analytic Models and this recent article

1. Stock markets continue upwards even more, so equities could be bought after the seasonal dip in October if we get one.

2. Bond yields rise, and bond prices fall, and so bonds could be shorted.

3. Gold falls and so could be shorted.

As predicted in my last article of this type last month, the above trades are playing out right now.


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Tradeweb Government Bond Update – September 2020

August’s government debt sell-off proved to be short-lived. Amid a flurry of central bank and economic news, 10-year government bond yields fell in September, with some pushed further into negative territory.

Italy’s 10-year bond mid-yield saw the largest decline, plunging 26 basis points to finish the month at 0.82%. Yields on Portugal and Spain’s benchmark notes also posted significant drops, decreasing by 15 basis points to 0.26% and 0.25%, respectively. While Portuguese Finance Minister Joao Leao said the economy was recovering better than expected, the European Commission still predicts a GDP contraction of 9.8% this year. Similarly, Spain’s GDP is expected to contract by 10.9% this year, however, the country’s Economy Minister Nadia Calvino forecasted an expansion of more than 10% in the third quarter.

Meanwhile, the German 10-year Bund yield fell by nearly 12.5 basis points to close at -0.53%. Data from Germany’s Federal Statistical Office showed that consumer prices were expected to decline by 0.2% in September. The European Central Bank, which left interest rates and stimulus programs unchanged at its latest meeting, said it would monitor the stronger euro. According to President Christine Lagarde, the ECB would follow the Federal Reserve’s lead to allow for an inflation target overshoot.

Across the Atlantic, the U.S. 10-year Treasury yield dropped by nearly 2 basis points to 0.68%. The Federal Reserve maintained the federal funds target range near zero and indicated it would remain there until at least through 2013. Specifically, the Federal Open Market Committee stated it would keep rates on hold until it achieves “maximum employment and inflation at the rate of 2% over the longer run”.

In the Asia-Pacific region, the mid-yield on Australia’s 10-year note dropped by 15.5 basis points to end the month at 0.82%. The AIG Australian Performance of Manufacturing Index declined 2.6 points in September for the second consecutive month. In Japan, 10-year benchmark bond yields decreased by 3 basis points to 0.01%. After winning the leadership of his ruling Liberal Democratic Party, Yoshihide Suga was elected prime minister, taking over from Shinzo Abe.


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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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