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Despite the Fed's neutral policy, the credit market will be searching for signs of broad-based weakness in the US economy. Economic growth this year is expected to slow from the +3.7% pace seen through the first 3 quarters of 1998 (Q4 GDP growth is expected at +3.5-4.0%), but that slowdown is not expected to be seen in the economic data for at least another 12 months. In fact, the December data that will begin emerging this week is expected to be strong and further foreclose any chance of a near-term Fed easing. The US credit market may therefore be left to tread water over the near-term, waiting for new developments on the US stock market, the global crisis, or the US economy. |
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Fed expected to conduct another supplemental system repoThe Fed today will likely conduct another supplementary repo to stay on top of its hefty holiday-related add need of about $1012 bln in the new current 2-week period that began last Thursday. Moreover, the Fed will likely need to replace the two repos that expire today, i.e., last Thursday's fixed $5.175 billion 4-day system repo and last Monday's $6.059 billion fixed 7-day system repo. The Fed is currently facing a huge add need of about $20 billion but that should begin to taper off later this week. The add need will quickly decline in coming weeks and could even revert to a small drain need in mid to late January. |
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Outstanding repos include two repos that expire tomorrow (the fixed $4.727 billion 15-day system repo and last Tuesday's $2.805 billion fixed 7-day system repo), last Thursday's fixed $3.850 billion 6-day system repo that expires on Wednesday, the fixed $2.710 billion 30-day system repo that expires on Friday, the fixed $3.150 billion 45-day system repo that expires on Jan 21st, and the fixed $2.0 billion 41-day system repo that expires on Jan 27th. Those operations total a whopping $19.242 billion. Last Thursday's dual 4-day and 6-day system repos were conducted with the funds rate trading at 5-1/2%, well above the 4-3/4% funds rate target. That upward pressure was tied to the Fed's underlying add need, as well as end-of-year demand for reserves and liquidity. |
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