Happy New Year!

Trad-Fi Market Summary

Here's a summary of the key macroeconomic events for the week starting December 30, 2024, to January 5, 2025:

Monday, December 30, 2024:

• 9:45 AM ET: Chicago PMI (Dec)

• 10:00 AM ET: Pending Home Sales (Nov)

• 10:00 AM ET: Dallas Fed Manufacturing Index (Dec)

Tuesday, December 31, 2024:

• 1:30 AM ET: China NBS PMIs (Dec)

• 2:00 PM ET: S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (Oct)

• 2:00 PM ET: FHFA House Price Index (Oct)

Wednesday, January 1, 2025:

• Markets are closed for New Year's Day.

Thursday, January 2, 2025:

• 8:30 AM ET: Initial Jobless Claims

• 9:45 AM ET: S&P Global US Manufacturing PMI (Final) (Dec)

• 10:00 AM ET: Construction Spending (Nov)

Friday, January 3, 2025:

• 10:00 AM ET: ISM Manufacturing PMI (Dec)

• 10:00 AM ET: Vehicle Sales (Dec)

• 1:00 PM ET: Speech by Federal Reserve Bank of Richmond President Thomas Barkin

Liquidity Summary (Fed liquidity guide)

U.S. domestic liquidity (Fed NL) was negative $128B this week with almost $200B in year-end window dressing. This brings the chart to the bottom of the channel once again as seen in most quarter-end results the last 2 years. That said, we can expect a year-open with reversing most of this window dressing in the first few weeks. The timeline from recent posts is still intact through 1/10. (Reminder: what is window dressing?)

In global liquidity, despite repeated announcements of liquidity injections, the PBoC withdrew 1.15 trillion yuan ($158 billion) from the financial system through the MLF tool, marking the largest liquidity removal in a decade. Meanwhile, China’s bond market is experiencing debt deflation with crashing yields as their 10-year bond yields are near-record lows at 1.71%.

For the complete view of global liquidity and projections see the Macro Timeline Update for premium members.

Secured Overnight Financing Rate (SOFR):

The SOFR has experienced the biggest spike since the Fed came off pause. These types of spikes signal major liquidity stress, likely due to the year-end window dressing mentioned in the last two market updates. However, the magnitude suggests there could be additional pressure points in the funding markets

Reverse Repo Market (RRP):

As mentioned last week, the RRP balance got under $100B after the Fed reduced the rate on the overnight reverse repurchase agreement (RRP) facility by 30 basis points, aligning it with the floor of the Fed Funds rate. This adjustment could accelerate the movement of funds out of the RRP facility, potentially moving the RRP balance toward zero as money market funds and other eligible counterparties might seek more lucrative investments elsewhere. However, this week we got almost $200B in window dressing added back in and we will likely get a bit more on Monday and Tuesday before year-end.

Treasury General Account (TGA):

The TGA closed the week at $689B and will likely see a $40-50B increase for year-end window dressing to close around $740B. After this, the TGA will reverse that window dressing plus some into January. (For the full projection and macro timeline on this see the premium update) Once the balance gets to the policy limit, the Treasury will use “extraordinary measures” borrowing to keep above this key level until March when the debt ceiling debate will rage on.

Bank Flows (Defunct BTFP):

As of 12/24/24, Money Market Fund (MMF) total assets stood at approximately $6.81T, which is up about $11B over 2 weeks. Assets of retail money market funds increased to about $2.71T, while institutional MMF balance totals are $4.1T.

If MMF cash followed prior rate cut timelines, we would be looking at April-October to see those funds move into other assets. However, I would assume this would be on the lower end of the timeline due to the increasing skill level of traders.

Fed Balance Sheet (QE/QT):

The Federal Reserve has reduced the size of its balance sheet by 10.7% this year, which is the largest percentage decline of any year on record… yet still less than half of 2020’s stimulus has been removed so hard to get a slow clap going here..

That said, the Fed got a lot further than I thought they would but the debate rages on for when QT ends and in what forms does it live on.

Federal Reserve & Co.

Not much has changed in market expectations for the Fed’s rate policy through May since the last FOMC meeting. It is clear that central banks will follow the Fed’s lead (as they also do) to slow easing but easing will continue either way.

USD VS Everyone Else

The U.S. dollar has demonstrated significant strength recently, with the DXY index hovering near multi-year highs. This resilience can be attributed to several factors, including robust U.S. economic data, expectations of sustained higher interest rates from the Federal Reserve, and global geopolitical tensions.

The big question is will Trump 2.0 & Co. look to reduce dollar strength or lean in for the next 4 years?

Chinese Yuan (CNY): The Yuan has faced depreciation pressures, reaching one-year highs against the USD, signaling a weakening local currency. The People's Bank of China has been actively managing liquidity, notably by withdrawing significant amounts from the system, which contrasts with their public calls for stimulus. This move is part of a broader strategy to control inflation and stabilize the currency amidst domestic economic challenges like a property market slump and weak consumer spending. The USD/CNY rate has been volatile, reflecting China's economic uncertainties and the central bank's intervention policies

Japanese Yen (JPY): The Yen has been notably weak against the dollar, with the USD/JPY rate falling by 0.16% to 157.75 recently. This depreciation comes despite earlier expectations of a tighter monetary policy following comments from the Bank of Japan (BoJ). However, the market's focus on the widening yield differential between Japan and the U.S., coupled with Japan's persistent low interest rates and negative yield policies, has kept the yen under pressure. This has made the yen an attractive currency for carry trades, further pushing its value down. The market is watching closely for any signs of intervention by Japanese authorities as the yen approaches levels that have historically triggered action

Euro (EUR): The Euro has experienced a weakening against the dollar, influenced by divergent monetary policies between the European Central Bank (ECB) and the Federal Reserve. The anticipation of slower rate hikes in the Eurozone compared to the U.S. has led to a depreciation of the EUR/USD pair. The euro's weakness is also compounded by economic growth concerns within the Eurozone, particularly in Germany, where manufacturing PMI data has been disappointing. The ECB's cautious approach to rate hikes, aiming to balance inflation control with growth support, has not been enough to bolster the euro against the dollar's strength. However, there's a mixed sentiment with some analysts suggesting potential for a late 2024 recovery if the Eurozone manages to address its economic challenges effectively.

Bitcoin Summary

After a few days of net outflows, the Bitcoin ETFs put in a massive day of inflows on 12/26 led by Ark and Fidelity buying the dip here.

Tether has burned over $800M coins over the last week. Typically, when Tether burns coins (reduces USDT supply), it can lead to an increase in Bitcoin price due to: 1. Increased demand: for Bitcoin if USDT holders convert their stablecoins to Bitcoin. 2. Perceived stability: in the market, potentially boosting investor confidence in cryptocurrencies like Bitcoin.

The biggest cause for concern at the moment (bearish case) is the monthly candle that is about to close as a bearish pin bar candle (reversal candle) if we don’t get a month-end rally to save it.

Either way, window dressing and tax loss harvesting will be over on 12/31 and those will be reversed on 1/2 market open as the Global bid/ask ratio flashes its first buy signal in almost 3 months.. I am not worried about another drop into the year's end.

Bitcoin Daily

Bitcoin continues to accept prices under the November close / December open as the year comes to an end. As outlined in the liquidity section, I think this is largely due to year-end window dressing, tax loss harvesting, and holiday volumes. However, the trading view idea from 12/15 has called the dip perfect and the window for upside is still open until 1/10 (basically most of January) so we will see!

Bitcoin LRC Chart

We got 2 red candles on the 2023 dip after March-October consolidation that touched the 50% fib.. I would bet we don't test the 50% on this pullback but a quick flush to $80k area makes sense and would welcome it to kill “Alt season” so we can go higher.