Credit and Money Supply
Indicators:
The injection of capital and
elimination of caps on swap lines between foreign central banks and the Fed
have engineered modest improvement in credit indictors over the past week.
In addition, to our close
observation of Libor fixings and the LIBOR-OIS spread, we also pay close
attention to the TED spread as an indicator of financial health. The TED
spread has narrowed by 169 points, but the elevated reading of the VIX
indicates continued fears in market. However, the improvement in the TED
spread is an indication of the market slowly beginning to function.
Unfortunately, the improvement
has not been paralleled by the LIBOR-OIS spread. This spread has only
compressed by 60 basis points and is another indicator of continued stress in
credit markets.
Commercial Paper
There is a modest signal that
lending has restarted on the back of the Fed program to purchase commercial
paper. Through the end of the week, the major target appears to have been the
commercial community, as the non-financial community continues to suffer.
Bank Assets
Commercial banks see an
increase in assets and a modest restart to lending with consumer still drawing
on home equity.
Fear still pervades among
financials. Banks are holding excess reserves which is an indicaton that
banks are horading cash in the aftermath of the Treasury’s annoucement one
week ago.
Monetary Aggregates
MZM declines while adjusted
monetary base skyrockets. With velocity of money declining and Fed mopping up
excess liquidity in the market, risk of inflation has substantially moderated
in the near term. However, given the sharp increase in the adjusted base the
market should closely observe continuing Fed action to sterilize those
increases.
