The latest data on unemployment and job creation have surprised on the upside. They continue to be better than the long-term average. This strong labour market supports household confidence, which remains well above the long-term average, and retail sales, which did slightly better than expected. However, several numbers have come in below expectations and are below historical averages. This points towards a slowing economy, despite the satisfactory GDP data for the third quarter. Noteworthy in this respect are the two ISM indices. In addition, like in numerous other countries, industrial production is under pressure.
The 2014 reform of US money market funds led to a massive reallocation of cash from funds invested in private debt (prime funds) to funds invested in public debt (government funds)*. Foreign banks, traditional borrowers of prime funds, were deprived access to US dollars, while the US Treasury, federal agencies and American banks attracted fund inflows**. With the improvement in average returns over the past two years, the savings collected by government funds and prime funds have both increased sharply, up USD 450 bn and USD 430 bn, respectively
In recent weeks, equity markets performed well. Focussing on the US, it is hard to argue that this reflects an improvement in the earnings outlook or a perspective of more rate cuts than hitherto expected. This would imply that a decline in the required risk premium was the key driver. US treasury yields also increased significantly, which probably reflects to a large degree an increase in the term premium. The decline in the equity risk premium and the increase in the bond term premium were driven by a common factor, namely a reduction in economic tail risk on the back of progress in the trade negotiations between the US and China and a stabilisation of certain survey data
On 10 October 2019, US banking regulators increased the application thresholds for the capital and liquidity requirements imposed on large banks. Whilst the new rules do not change the prudential requirements for the eight biggest banking groups, they do reduce the burden for large regional banks. The number of banks subject to the Basel Liquidity Coverage Ratio (LCR) requirement will be reduced and the definition of core equity relaxed to some degree. In general terms, the rules as finalised over the past two months will significantly narrow the scope of application of Basel 3 in the USA. Given concern over lending trends in certain segments and the continued economic slowdown in the US, this relaxation of regulations catches attention.
Do fluctuations in uncertainty have a symmetric or asymmetric effect on the economy? The question is important considering that since last year, uncertainty has been acting as a headwind to global growth. Moreover, recent news about the US-China trade negotiations and Brexit have raised hope that uncertainty may have peaked and that growth in activity could accelerate. Empirical research shows that an increase in uncertainty has a bigger effect on the economy than a decline, in particular in a subdued growth environment. This would suggest that, should the decline in uncertainty be confirmed, the pick-up in growth would be very gradual.
Concerned about reducing pressure in the money markets, the Federal Reserve (Fed) will proceed with outright securities purchases in addition to its repurchase agreement operations (repo). At the end of the year, between USD 365 bn and 400 bn* in central bank money could thus be injected into the current accounts of banks. Given the current amount of the outstanding liquidity lent, the upward trend in currency in circulation and the foreseeable rebuilding of the Treasury account with the Fed, the banks’ reserves with the central bank are unlikely to increase by more than USD 130 bn by the end of the year (to a total of nearly USD 1600 bn, the April 2019 level)
