- Fed, ECB, BoE, BoJ, BoC and SNB lowered the cost of swap lines by 50bps starting 12/5. In addition, the ECB has cut the excess margin it was charging on these trades from 20% to 12%.
- China cut RRR by 50bps. No cut was expected
- ADP printed 206k for Nov vs 130k exp and 110k prev
- Chicago PMI improved to 62.6 in Nov vs 58.5 exp and 58.4 prev
- Bank runs in Greece: ~7% of deposits left Greek banks in Sept and Oct – BBG
- EZ CPI Estimate for Nov came in at 3% as exp
- EZ UE increased to 10.3% in Oct vs 10.2% exp and prev
- German UE declined to 6.9% in Nov vs 7% exp and prev
- Italian CPI declined to 3.7% in Nov vs 3.8% exp and prev
This swap line news is basically an easing action for non US banks with USD liabilities. The impact of this is only marginally positive. A 50bps ease for a hypothetical EU bank levered 20x with 20% of its assets funded in USD means higher profits of 50bps * 20 * 20% = 2% after 1 year. Also, the fact that the EURUSD basis didn’t move much (-26bps to 131bps) suggests that most banks think the stigma of using the swap lines costs more than the savings in funding. In other words, this doesn’t appear to do much other than help confidence a bit. In a balance sheet recession, lower funding costs are insufficient to offset deleveraging effects, as Japan can attest. Today is month end, and hence we’ve likely seen the majority of month end flows. Today’s jump puts the S&P well into short term overbought territory and is a nice setup for a short.
Also, note that with this intervention, Libor settings will be less reflective of tensions in the USD funding market. EU banks’ CDS and share prices will once again take center stage. Note that the rate to access the Fed Discount window is 75bps, higher than the 61bps or so for USD funding via the swap lines. As a result, the Fed may cut the Discount Window rate by 13 or 25bps in the near future, but it doesn’t really matter what they so, as the discount window is basically not used right now.