Tom Essaye Quoted in Forbes on March 14th, 2023

Inflation Fell To 6% In February—But Some Experts Fear Banking Crisis Could Make Prices Worse

“If the bank crisis is limited to just a few banks, then the actions taken on Sunday by the Fed and Treasury will prove inflationary,” says Sevens Report analyst Tom Essaye. “By backstopping the depositors, the government has avoided the lion’s share of economic loss from this crisis,” he says, and the $25 billion Bank Term Funding Program, which offers banks loans of up to one year, will increase the Fed’s balance sheet a time when it’s actively trying to shrink it, further reversing the central bank’s recent policy actions, Essaye explains. Click here to read the full article.

Fed Wildcards to Watch

What’s in Today’s Report:

  • Wildcards to Watch: Tapering Schedule and Balance Sheet Reduction
  • Chart: Inside Day in the S&P Underscores Trader Indecision
  • Technical Breakpoints for the Market Today

Stock futures are firmly higher as trader focus shifts ahead to the Fed while investors digest mostly upbeat earnings.

MSFT initially fell by 7%+ after earnings yesterday but a positive outlook by management during the investor call has helped shares turn positive and rise by more than 4%.

Looking into today’s session, there are two economic reports due out this morning: International Trade in Goods (E: -$95.1B) and New Home Sales (E 760K) but neither should move markets ahead of the FOMC Announcement (2:00 p.m. ET) and Fed Chair Press Conference (2:30 p.m. ET) which will be the main events today.

Earnings today include: BA (-$0.09), T ($0.76), FCX ($0.96), PGR ($0.99), TSLA ($2.26), INTC ($0.90), STX ($2.36), RJF ($1.77).

Bottom line, the market is coiled up after the volatile start to the week and whether the Fed is dovish or hawkish today will decide whether we see a relief rally or break down to new lows.

Tom Essaye Interviewed on TD Ameritrade Network The Watch List on January 5, 2022

Breaking Down The FOMC December Minutes

The Fed is already actively discussing shrinking the balance sheet showing they are serious about being hawkish, and stocks dropped…says Tom Essaye of The Sevens Report. Click here to watch the full interview.


FOMC Preview and Projections plus the Wildcard to Watch, July 25, 2017

FOMC Preview: Get the simple talking points you need to strengthen your client relationships with a free trial of The Sevens Report.

Tomorrow’s FOMC meeting is important to markets for multiple reasons, because it will give us additional color on when the Fed will begin to reduce its balance sheet, and whether a December rate hike is still on the table.

Those revelations will be the latest catalyst for the ongoing battle between “reflation” (which means cyclical sectors like banks, industrials and small caps outperform) or “stagnation” (super-cap tech and defensive sector out-performance).

Given the latter sectors have been the key to outperforming the markets in 2017, understanding what the Fed means for these sectors is critically important. Remember, it was the Fed’s “hawkish” June statement that saw Treasury yields rise and banks and small caps outperform from June through mid-July. And, it was Yellen’s “dovish” Humphrey-Hawkins testimony that reversed the rise in yields and resulted in the two-week outperformance of super-cap tech (FDN) and defensive sectors such as utilities. So again, while not dominating the headlines, the Fed is still an important influence over the markets, just on more of a micro-economic level.

What’s Expected: No Change to Interest Rates or Balance Sheet Policy. The Fed is not expected to make any change to rates (so no hike) or begin the reduction of the balance sheet. However, and this is important, the Fed is expected to clearly signal that balance sheet reduction will begin in September by altering the fifth paragraph to state that balance sheet normalization will begin “soon” or “at the next meeting.” Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Hawkish If: The Fed Reduces the Balance Sheet. This would be a legitimate hawkish shock, as everyone expects the Fed to start balance sheet reduction in September. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Dovish If: No Hint At Balance Sheet Reduction. If the Fed leaves the language in paragraph five unchanged (and says balance sheet reduction will happen “this year”) markets will react dovishly, as balance sheet reduction likely won’t start until after September, and that means no more rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Wild Card to Watch: Inflation Language.

So far, the Fed has been pretty dismissive regarding the undershoot of inflation, but that may change in tomorrow’s statement. If the Fed reduces its outlook on inflation (implying low inflation isn’t just temporary) or, more significantly, implies the risks are no longer “roughly balanced” (which is Fed speak for we can hike at any meeting), then a December rate hike will be off the table, and that will result in a likely significantly dovish move. If made, that change will come at the end of the second paragraph.

Bottom Line

To the casual observer, this Fed meeting might look like a non-event, but there are a lot of potential changes that could have significant implications on sector performance over the next few months. So, again, getting this Fed meeting “right” will be important from an asset allocation standpoint.

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Fed Balance Sheet Primer, April 11, 2016

Fed Balance Sheet Primer

An excerpt below from today’s subscriber edition of Sevens Report.

Fed Balance Sheet Primer

Markets remain consumed by politics and geopolitics, but really the biggest macro surprise so far for 2017 came from the Fed last week, with the realization that they could begin to shrink their balance sheet in 2017. That event has potentially hawkish implications for bonds (bonds lower, yields higher), the dollar (higher) and stocks (increased headwind).

We initially warned about this possibility back in mid-March in our FOMC Preview. And, as we said back then, you’re going to be reading a lot more about this in the coming weeks, so I want to cover this topic more fully so that everyone has proper context.

Why Is The Fed Balance Sheet Important? The Fed balance sheet has ballooned over the past eight years given all the bonds it has purchased through the various QE programs. Unwinding that balance sheet without up-setting asset markets is quickly becoming the Fed’s highest priority.

To get specific, right now the Fed reinvests all the proceeds from a matured bond on its balance sheet—but that’s going to change. If the Fed gets $100 million in short-term Treasuries redeemed, right now it simply buys $100 million worth of new Treasuries. But when the Fed stops that reinvestment, that $100 million wouldn’t go back into the bond market, removing a source of demand.

The point is that when the Fed stops reinvesting principal, that will be potentially bond negative/yield positive, and that process needs to be managed very carefully considering the size of the balance sheet ($2.4 trillion in Treasuries, $1.7 trillion in mortgage backed securities).

When Will the Fed Stop Reinvesting All Bond Proceeds? Until last Wednesday, the unanimous answer would have been “2018.” But, following the Minutes, it’s looking more likely that the Fed could begin to end reinvestment of proceeds in December 2017.

Very Hawkish If:… Hawkish If:… Neutral If:… Dovish If:…

The above section is withheld for subscribers—sign up for a free trial to unlock.

What Will the Fed Stop Buying? Right now, the Fed rein-vests proceeds from both Treasuries and Mortgage-Backed Securities (MBS), so the question facing markets is whether the Fed will stop reinvestments in just one of these two securities, or whether it will stop reinvestments in both. Until the Minutes, it was assumed the Fed would only begin halting reinvestments in MBS (that way they could further support Treasuries, the more critically important market).

Hawkish If: … Neutral If: …

The above section is withheld for subscribers—sign up for a free trial to unlock.

How Will the Fed Stop Reinvesting Proceeds? The major question here is whether the Fed will slowly reduce the amount of reinvestment gradually, or whether it will just halt reinvestments all together. To illustrate the point, if one week the Fed has $100 million in bonds paying off, will they reinvest $50 of the $100 and reduce that number gradually over time, or will they just not reinvest any of the $100?

Given Fed history, a gradual reduction is what everyone expects; however, in the Minutes they talked about zero reinvestment, and it seems like the Fed is getting a bit antsy to get policy closer to normal.

Hawkish If:… Neutral If:…

The above section is withheld for subscribers—sign up for a free trial to unlock.

Bottom Line

This topic isn’t exactly exciting, and it won’t grab the headlines, but it is shaping up to be one of the bigger market influences in 2017. The reason why is simple: No one knows what’s going to happen to the bond market once the Fed begins to remove itself. On a percentage basis, it’s not like the Fed dominates the daily trading in Treasury markets. Yet sentiment is a funny thing, and the Fed needs to manage the unwind of a $4.1 trillion balance sheet successfully, because the potential for some sort of a market dislocation (especially in the age of algorithms and HFTs) isn’t insignificant. So, please keep this primer as a reference point, because I would be shocked if the Fed balance sheet doesn’t cause some sort of volatility in 2017 (beyond just the Wednesday reversal the news caused last week).

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