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On August 30th, following the release of the PCE data, the Federal Reserve remains on track to cut interest rates at its September 16-17 meeting. Michael Lorizio, head of U.S. interest rate trading at Manulife Investment Management, said, "PCE reduces the risk of a September rate cut being derailed. At least from this perspective, the inflation component doesnt play any role in reducing the probability of a September rate cut." Long-term bond yields rose on Friday as traders closed positions before the long weekend and repositioned for the end of the month. Some interest rate hedges may also have an impact on the market, and the corporate bond market is expected to pick up next week as many people return from summer vacation. Lorizio said, "Were going to have a very busy week... The primary market and all the spread product markets are back in full swing, especially the corporate bond market." August employment data will also be released next Friday, which may be key to determining the Feds near-term policy.Dont expect to hear much from the Federal Reserve Board of Governors before their next meeting in mid-September. The Feds board of governors announced that no board members plan to make public appearances before September 7th. This puts us in the "interval" before the Feds September meeting, with Fed Governor Wallers speech Thursday evening likely to be the final statement from the board before the crucial September meeting. Theres still time to hear from regional Federal Reserve presidents on interest rate policy, including a speech on the US economy and monetary policy from St. Louis Fed President Moussallem scheduled for next Wednesday.On August 30th, Hong Kong Monetary Authority Deputy Chief Executive Chan Wai-min stated at the 7th Guangdong-Hong Kong-Macao Greater Bay Area Financial Development Forum that the HKMA actively encourages mainland enterprises to establish overseas business headquarters and corporate treasury centers in Hong Kong to coordinate the allocation of overseas funds. Regarding payments, the current global payment system still suffers from numerous intermediaries and high payment costs. With technological advancements, these issues will gradually be addressed. One example is the application of blockchain technology in the payment sector. Hong Kong is currently simultaneously promoting the use of central bank digital currency and commercial bank currency, hoping to provide more convenient and cost-effective solutions for future cross-border trade and investment payments.The Federal Aviation Administration announced the suspension of all SkyWest Airlines flights.Conflict Details: 1. The attack on a Ukrainian naval vessel has resulted in two deaths. 2. Russian Ministry of Defense: Russian air defense forces intercepted and destroyed 54 Ukrainian drones the previous night. 3. Ukrainian military: A nighttime attack on fuel facilities in Russias Bryansk region was carried out. 4. Russian Defense Minister: The Russian militarys advance in Ukraine has accelerated, advancing approximately 600 to 700 square kilometers per month. Ukraines military and industrial infrastructure has suffered significant damage. Other Developments: 1. Market News: Ukrainian President Zelensky and European leaders will meet with Trump next week. Zelensky wants legally binding security guarantees. 2. EU High Representative for Foreign Affairs and Security Policy Kallas: Member states will decide on deploying troops to Ukraine. 3. Swedish Defense Minister: We can contribute in the air or maritime domains. 4. Estonian Defense Minister: Russia cannot dictate what we do in Ukraine. NATO membership would be the best security guarantee for Ukraine. 5. Russia stated that the current state of Russia-US relations remains the main obstacle to cooperation on nuclear arms control. 6. Russian Defense Minister: The Ministry of Defense will hold a meeting in December to report on its work performance to Russian President Putin.

After A Fed Rise, The U.S. Banks Stress Index Might Deteriorate

Aria Thomas

Jun 17, 2022 11:09

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An indicator of credit risk in the U.S. banking sector may be exhibiting symptoms of strain as the Federal Reserve's aggressive rate rise path heightens economic pain forecasts.


According to Refinitiv data, the so-called FRA-OIS spread, which measures the difference between the U.S. three-month forward rate agreement and the overnight index swap rate, jumped to 29.50 basis points on Thursday, its widest level since May 23. The value was -11.66 basis points earlier in the week.


Widely regarded as a barometer for banking sector risk, a wider spread indicates that interbank lending risk has increased.


The recent increase in the margin between forward rate agreements and overnight index swap rates is worrisome, according to J.P. Morgan Asset Management global market analyst Jordan Jackson. "As the Fed becomes more hawkish, recession fears increase, hence boosting the underlying credit risk."


The Federal Reserve hiked interest rates by 75 basis points on Wednesday, its largest rise since 1994. Markets have been rocked by the prospect of more dramatic tightening, and fears of a future recession have intensified.


This month, the central bank also started letting bonds to expire off its more than $8 trillion balance sheet without replacing them, a procedure known as quantitative tightening that Jackson warned may possibly deplete the financial system's liquidity.


As the world's biggest holder of U.S. government debt lowers its market presence, this sentiment is shared by other investors who are concerned that market conditions may deteriorate.


"Now that quantitative tightening has formally begun, reserve draining has been rather steady over the last several months," Jackson said, adding that he expects the FRA-OIS disparity to become much wider.


Wall Street also perceives an increase in the likelihood of default by large banks.


On Thursday, credit default swap (CDS) spreads for JP Morgan, Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) were nearing two-year highs.


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