By Denny Gulino
THE TREASURY DEPARTMENT (MaceNews) – As probabilities of a rate cut Wednesday kept falling and the Saudis get more optimistic about maintaining oil shipments, the Tuesday news was highlighted by the Federal Reserve’s resurrection of its money market support, now set to be implemented for a second day.
The Fed’s daily report on the fed funds rate confirmed it had risen to the top of its range Monday, 2.25% as liquidity appeared to be impaired in the repo market, near quadrupling the repo rate to as much as 8% to 10%. Market participants said the injection of more than $50 billion, with the Fed’s first purchase of securities aimed at the money market in a decade, seemed to relieve some of the pressure.
The Fed action, more prudent adjustment than any crisis response, may prompt some tweaking of the Fed’s tool set that could be revealed in the FOMC statement Wednesday and Chair Jerome Powell’s remarks and answers at the news conference afterward.
As for now, market participants can only speculate as to the causes, like early quarterly tax payments and the depletion of excess reserves. But some wondered if it was only coincidence that some evidence of counterparty risk premium was accompanying the new risk premium evident in the oil market.
Even with more reassurance coming from Ryadh that September oil shipments will be close to typical and that repairs of the bombed processing equipment can be more than 50% repaired within a relatively short time, oil prices Tuesday remained elevated. Although down nearly 1 percent, West Texas Intermediate was still more than $58 at the end of the day.
Investors who now are keenly aware how concentrated are the Saudi oil assets just a few hundred miles from what is literally enemy territory may be reluctant to see the new risk premium fade any time soon.
President Trump, roaming the West Coast, neglected to blast the Federal Reserve Tuesday, the beginning of the two-day Federal; Open Market Committee meeting, at least by late in the day. He also did not address Iran or the oil disruption, although he did find time to again pillory The New York Times amid his tweets. Yet the “locked and loaded” tweet of the weekend seemed long ago and far away with no evident preparations under way for any military action against Iran and several Trump comments on the record that he would rather not be at war with anyone.
Meanwhile, the CME Fedwatch Tool, based on fed fund futures, showed the perceived probability of a rate cut had fallen Tuesday to nearly 50-50 from the more than 80% probability earlier.
The Treasury 10-year yield remained above 1.8% through the day, safe from inversion with the 3-year and 2-year although backing off slightly. It was noteworthy that the German 10-year had a minutely positive yield.
The fact that the major U.S. stock indices could finish slightly higher for the day was also a marvel for some, so soon after the attack on Saudi territory. There was no new definitive information on who launched the attack although pictures distributed by the Saudis seemed to confirm that Iran had manufactured some of the ordnance, hardly a surprise for the main arms supplier to the Saudi enemy, the Houthis.
Iran Monday had ruled out any meeting between Trump and President Rouhani at the United Nations next week.
Worth mentioning are the two announcements Tuesday at the Treasury Department where this is being written, the report on international capital flows that showed for the second month this year Japan’s holdings of U.S. Treasuries exceeded China’s with the gap widening to $20.5 billion in July from $10.4 billion in June.
The Peterson Institute reported that China’s foreign direct investment in the United States declined 80% from 2017 to 2018, a trend that likely overwhelms any effect from new regulations Treasury proposed Tuesday to screen such investment for national security concerns.
The Treasury screening committee that was recently given enhanced powers by Congress, best known as CFIUS, announced a 30-day comment period on rules that would prohibit some countries’ investors from buying real estate within a mile of a U.S. airport, in certain cases within 100 miles unless they are in congrested urban areas.
Which countries are covered by the new rules that add restrictions on even partial ownership in 27 “critical” U.S. industries will be known by February when implementation begins. Treasury insists it’s not aiming the regulations at any particular country and that the U.S. still welcomes foreign investment.
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Contact this reporter at denny@macenews.com