Fed Bank Credit
The Fed's currency swap line fell again in the past week as EU liquidity jitters continue to
lighten. FBC is now about flat for the year and is up at only a 4% annual rate since mid-2011.
Unless there is a sudden worsening within the EU banking sector requiring more US$ infusion,
FBC is likely to flatten out or even drift a bit lower. So far since 2009, the stock market has
tended to grow uncomfortable without Fed QE at its back.
Banking System Liquidity
Measured yr/yr, my broad measure of credit driven liquidity stands +4.6%. Much of this increase
directly reflects Fed QE. The loan book for the banking system is also up 4.6% yr/yr and the
recovery in loan demand is rising with all major sectors now participating. Banks are flush
with liquidity and have been able to expand the loan book and Treasury holdings at the same time.
Thus, there has been little emphasis on competing for deposits or issuing holding company
commercial paper which tend to expand the broad liquidity pool. With the Fed not now providing
QE support, rises in bank lending and the broad deposit base to 6% yr/yr would leave me more
comfortable with the stock market, although system private sector lending is finally showing
some decent acceleration. Hard to tell yet whether the stock market is taking much notice.
Money Market Funds (Cash Reserves)
MMFs in aggregate increased by roughly $50 bil. in late 2011 and early this year but this build
has largely been drawn down in recent weeks. Further support for the stock market, should it
come, may reflect draws on the large Treasury and the small PM markets.
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