Charts of the Week

In 2014, the Securities and Exchange Commission (SEC) adopted reforms to limit the scope of US constant net asset value money market funds. Money market funds that until then were invested in private debt (prime funds) had to abandon this model while funds that were invested in public debt (government funds) retained the ability to provide a guarantee to investors that they would recover all of their original investment*.

Starting in October 2015, the reforms have led to a massive reallocation of cash from prime funds to government funds. Foreign banks, traditional borrowers of prime funds, were deprived access to US dollars while the US Treasury and federal agencies attracted fund inflows. Part of these fund inflows has been lent to US banks.

Overall, over the past three years, liquidity allotted directly or indirectly by money market funds to US banks increased by USD 155 bn, while funds allotted to foreign banks fell by USD 115 bn.

*See Choulet C., US money market funds and US dollar funding, BNP Paribas, EcoFlash, 16 July 2018

NEXT EUROPEAN PARLIAMENT PROJECTION Published on 9 Jan 2019 by Frédérique CERISIER
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The European parliamentary elections in May 2019 will mark the start of a major process of renewal for European institutions. After Brexit, the European parliament will have only 705 seats, from 751 at present.

Aggregating national polls can help produce projections for the make-up of the new parliament, although naturally these need to be treated with some caution. According to current projection by Poll of Polls, a weakening position for the dominant conservative and social-democrat groupings may be on a sufficient scale to prevent the PPE and S&D alliances from taking a majority in the European parliament. The liberal/centrist ALDE group, if its rising poll numbers feed through into the ballot boxes, hopes therefore to become a supportive force able to forge compromises. Under the current projections, groups housing members from Eurosceptic, sovereigntists and nationalist parties will see a bump in their numbers, increasing their influence. Thus, the nationalist ENF group, which includes in particular members from the Italian Lega and the French RN (formerly Front National), will be neck and neck with the European Conservatives and Reformists (PiS, Debout la France, N-VA, etc.). However, they will still fall far short of a majority.
BRAZIL'S EXPORTS DYNAMICS AMIDST THE US-CHINA TRADE WAR Published on 2 Jan 2019 by Salim HAMMAD
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China has never looked back since overtaking the United States as Brazil’s main trading partner back in 2009. In fact, data on a 12 month rolling basis show that over the past year China has further cemented its position as Brazil’s top export market increasing its market share by 5 pp since November 2017 to now account for 30% of Brazil’s exports. At end 2017, Brazil already exported USD 20 bn more to China than it did to the US (USD 47.5 bn vs USD 27.2 bn) and while Brazil has a trade surplus with both economies, the surplus with China was roughly 10 times larger than that with the US (~ USD 20 bn). The recent surge in the data results in part from Brazil capitalizing on the US-China trade war in particular regarding the redirection of soybean trade. Soybeans exports alone covered (in USD terms) the equivalent of about 1.5 times Brazil’s five main exports to the US in 2017.

Surely, Brazil’s exports suffer from concentration risk as 80% of its soybeans, 50% of its ores and 35% of its mineral fuels and oils (including crude) exports are absorbed by China. As Bolsonaro gets sworn in, there is no doubt that cherishing his relationship with Beijing will go a long way to upholding Chinese trade and investment in the country (Brazil’s attracts more than half of all Chinese FDI in Latin America). Bolsonaro’s visit to Taiwan in 2018, his comments about “China buying Brazil” and his appointment of a pro-US Minister of Foreign Affairs has nonetheless left most observers wondering whether his geopolitics will “trump” Brazil’s economic interests.

On the Same Theme

The Powell put 1/11/2019
Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth. Professional forecasters' estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.
Monitoring US recession risk 1/8/2019
Market behaviour and comments from company executives point towards increasing concern about the risks of a recession in the US. Based on the historical experience, the pace of monthly job creations is a key indicator to assess this risk.
The big growth scare 1/4/2019
The big correction of US equity markets since the end of September reflects increased investor concern about the growth outlook. The data for the 4th quarter nevertheless point towards ongoing sustained growth. Data released since the start of the year provide conflicting signals with a big decline in the ISM manufacturing index and a strong increase in non-farm payrolls. Uncertainty about US-Chinese trade remains a key factor weighing on business sentiment.
Data surprises send mixed signals 1/4/2019
The vast majority of the indicators remain above their long term average, with inflation and the core personal consumption expenditures deflator being notorious exceptions. Compared to consensus expectations the picture is mixed.
Will central bank reserves soon become insufficient? 12/21/2018
Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.
United States: the increased role of Federal Home Loan Banks 12/21/2018
In the US, the preservation of liquidity ratios has hidden the greater use by banks of financing from Federal Home Loan Banks, which themselves are highly exposed to the risk of maturity transformation.
Heading towards slower growth in 2019 12/11/2018
US growth should slow in 2019 on the back of the waning impact of the fiscal boost, slower global growth, the strengthening of the dollar this year, the rise in interest rates. Slower but still above potential growth means that monetary policy will be prudent: we expect two hikes in the first half of the year, followed by a pause so as to gauge how the economy reacts to past tightening. This would lead to a monetary desynchronization because in the meantime eurozone inflation should have picked-up sufficiently so as to allow the ECB to hike its deposit rate in the second half of 2019. This desynchronization should cause the euro to strengthen versus the dollar. The key uncertainty to this outlook concerns the trade disputes between the US and Europe and in particular the US and China. Prolonged uncertainty on this matter would act as a headwind to growth.
Strong growth to slow down 11/30/2018
Most indicators remain above their long term average and several, of which the all-important non-farm payrolls, have surprised to the upside. Ongoing strong growth is reflected in the Atlanta Fed nowcast for the current quarter (an annualised 2.6% versus the previous quarter).
Federal Home Loan Banks help shore up bank liquidity ratios 11/7/2018
Since October 2017, the US Federal Reserve has gradually reduced the size of its balance sheet by limiting the amount of securities replaced at maturity. This automatically unwinds the banks’ reserves with the Fed. To preserve their short-term liquidity coverage ratio (LCR)1, some banks have increased their government bond holdings or reduced the use of unsecured wholesale funding. Recently, others have stepped up borrowing in the fed funds market (where institutions with Fed accounts trade their deposits and central bank reserves). This is largely due to the public guarantees on the Federal Home Loan Banks2 and their major lending capacity in this market. Considered as official sector deposits, fed funds borrowed from FHLB are relatively low cost (presumably high probability of being rolled over, and theoretically low cash outflows) and enable banks to rebuild their stock of liquid assets. 1 Banks are required to hold a sufficient amount of high-quality liquid assets, such as central bank reserves, to cover the net cash outflows triggered by a serious 30-day liquidity crisis. 2 A regional network of 11 home loan banks that provide financial support to the housing market via advances to member financial institutions.
Don’t mention the R word 10/31/2018
People update their expectations more quickly when media coverage of a given economic topic becomes more intense. The change in the outlook is more important than today’s cyclical environment. Monitoring media coverage of economic slowdown risk will become particularly relevant against the background of a loss of momentum in survey data

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