Steno Signals #78 – Santa Powell handing out gifts even to the naughty!
Happy Sunday from Steno Research and welcome to our flagship editorial.
Powell invited for a yuuuge risk asset party this week by allowing the market to continue to chase the narrative of material rate cuts in 2024. This is (again) reminiscent of the 2006-2007 pause when the Fed allowed financial conditions to ease materially in the run-up to the recession.
During a hiking cycle, loads and loads of USDs are parked in cash-like setups due to a sudden better relative yield premium in almost risk-free structures. The inflow to Money Market Funds (MMFs) has been extreme all year, sparked by the banking crisis in March.
Net inflows now total almost 1.5trn USD since a bit more than a year ago (see Chart of the Week #1)
Why is this relevant? 3-month T-bill yields (98% correlated to Fed Funds rates) lead the flows in/out of MMFs by 12-18 months (see Chart of the Week #2). By cutting rates in 2024, the Fed will strongly incentivize the flows from MMFs to move further out the risk curve. Equity markets are, among other things, celebrating big time due this flow effect.
As per usual, we will try to address the current Macro risk/reward via the best couple of charts in each asset class. Let’s have a look at the details.
Chart of the Week #1: 1.5trn in new MMF assets since 14 months ago
Chart of the Week #2: Flows in MMFs LAG the development in T-bill yields and MMF spreads by 12-18 months. We basically know that outflows will be seen in 2024/2025 now.
The animal spirits will likely be fully unleashed by Powell’s pivot and this is exactly what’s needed to bring about the type of complacency that is needed to foster the actual recession that everyones been talking about for a long while.