ParaImbal - Research

A Setup for a Bigger SOFR Rate Crises ( US Repo Market )

2/27/2025

(this version is a modified and updated report that was sent to "Clients" of "ParaImbal LLC" on 12/15/2024)

By Asseged Major

Overnight Loan Market (Fed Funds Rate & SOFR Rate )

The Overnight Loan market is where a Lender provides a Loan to a Borrower overnight for 1 day, and the interest is paid back with principal back to the lender from the borrower. Very Short Term overnight or 1 day.

The Fed Funds Rate is a Market between Banks that provide Loans to each other Overnight. These are mostly Overnight 1 Day Loans that pay interest. The SOFR Rate ( Secured Overnight Financing Rate ) is also an Overnight 1 Day Loan Market between Banks and other Financial Institutions. The difference is that the SOFR Rate Market collateral is provided by the Borrower to the Lender, where US Treasuries Bonds are provided as the collateral, and that is why the SOFR Rate market is considered a Secured Loan Market. For the Fed Funds Rate Market, it is considered an Unsecured Loan Market, because the Borrower does not have to provide Collateral to the Lender. All Overnight Loan Markets typically match the same interest rate return, meaning for example the interest rate in the Fed Funds Rate Market is going to be the same as the interest rate return in the SOFR Rate Market, if not there can be some arbitrage profit opportunity.

Importance of SOFR Rate Market
The SOFR Rate is very important because it is considered outside of the Fed Funds Rate market the most important Overnight Loan market in the American Financial Lending System (Note: SOFR Rate replaced the Libor Rate, as Libor Rate was permanently ceased ). In Addition, If Hedgers, Investors, Traders want to use Derivative Contracts to get exposure to the Fed Funds Rate, the most cost efficient and effective way is to buy or sell Futures Contract on the SOFR Rate. The Futures Markets for the SOFR Rate is a much more Traded and more Liquid Market than the Fed Funds Rate Futures Market, and this is why more Hedgers, Investors, Traders trade the SOFR Rate Futures contract rather than the Fed Funds Rate Futures contract.

Fed Funds Rate Impact on all Interest Rates
When the United States central bank “Federal Reserve” conducts interest rate policy, it targets the Fed Funds Rate market, meaning when the Federal Reserve is wanting to Raise Interest Rates or Lower Interest Rates in the Economy, they will do this by affecting the Fed Funds Rate Market through their policy tools which will directly have the effect of raising the Fed Funds Rate or Lowering the Fed Funds Rate. By raising or lowering the Fed Funds Rate, this has a spread effect of either raising or lowering all other Interest Rates in the US Economy, that is why it is very important.

SOFR Rate Crises 2019 (US Repo Crises)

In September of 2019, There was a SOFR Rate Crisis….., also termed the “ US Repo Rate crises ” . The SOFR Rate jumped in Huge divergence away from the Fed Funds Rate in just 1-2 days. From September 16 - 17, The SOFR Rate jumped from 2.43 % as high to 10 % in the intraday !,and then settled the next day to 5.25 % . While the Fed Funds Rate was at 2.25%. The Fed Funds Rate and SOFR Rate are typically the same or maybe just .01 off, for example on Sept 9 , 2019 both the Fed Funds Rate and SOFR Rate were at 2.12 % . Leading up to the days of the Huge Divergence on September 16th -17th, the crisis also caused the Fed Funds Rate to increase to 2.25 %, but a Huger Excess increase in the SOFR Rate. ( Look at Figure 1 & Figure 2 )

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 1)

SOFR Rate High Peak on Sept 17, 2019( Intra-Day )
(Figure 2)

( Source : Federal Reserve Bank of New York )

To put this in perspective of the SOFR Rate increase, an increase from 2.43 % to 5.25 % , is an increase of 282 Basis Points. This would be the equivalent of the Federal Reserve raising the interest rate of the Fed Funds Rate 12 Times ( 25 Basis Points increments = 0.25 % ), in 1 Day ! . During the day , the SOFR Rate high peak reached 10 %, this would be an equivalent of an increase of 757 Basis Points. This would be an equivalent of the Federal Reserve raising the interest rate of the Fed Funds Rate 30 Times ( 25 Basis Points increments = 0.25 % ) , in 1 Day ! .

Federal Reserve intervenes in SOFR Rate Crises in September 2019 ( US Repo Crises )

To bring the SOFR Rate back down and to the same levels as the Fed Funds Rate, the Federal Reserve intervened into the SOFR Rate market on September 17th , 2019. The Federal Reserve injected $ 75 Billion Dollars into the SOFR Rate Market. They provided $ 75 Billion Dollars as Loans in the SOFR Rate Market, which had the effect of driving down the SOFR Rate back to the level of Fed Funds Rate.

( Source : Federal Reserve )

What was the Cause of the SOFR Rate Crises in 2019 ( US Repo Crises ) ?

Main Assumption : Decrease in Supply of Cash Reserves in Banking System

By the Middle of September 2019, the amount of Cash Reserves in the Banking System reached multi-year lows at around $ 1.4 Trillion Dollars ( Look at Figure 3). During the 2 days of the SOFR Rate Repo Crises From September 16-17, there was a drainage of $ 100 Billion Dollars of Cash Reserves from the Banking System. Although a $ 100 Billion Reduction in Cash Reserves from the banking system in 2 days has occurred before, but it has not occurred during a time with a low level of Total Aggregate Cash Reserves ($ 1.4 Trillion ) in the system. The $ 100 Billion Reduction in the 2 days of the SOFR Rate Repo Crises, represented around a 7 % Reduction of Cash Reserves Levels ( $ 100 Billion / $ 1.4 Trillion ) in the Banking System. This Percentage Level of Cash Reserves being depleted in just 2 Days is a very large amount for the Banking System.

Figure 3 - Total Bank Reserves in Banking System
(Leading to SOFR Rate Repo - 2019 Crises )

(Source : Federal Reserve Bank of St. Louis )

The main assumption of the cause was that there was a Drainage of Supply of Cash Reserves in the Banking System, which caused a Higher Demand for Cash Reserves than the available Supply of Cash Reserves left in the Banking System. In other words, Demand for Cash Reserves Exceeded the amount of Supply of Cash Reserves. If Banks have less supply of Cash Reserves, they will be more unwilling to lend in the Overnight Loan Market like the SOFR Rate Market. They would have less extra Cash Reserves to invest and lend in this market. This would cause a decrease in the number of Lenders that are willing to lend in the Overnight SOFR Rate Market, and this is what happened, as the number of Lenders Decreased, meaning the Supply of Lenders decreased in the SOFR Rate market, the Interest Rate for the SOFR Rate increased by huge Large amounts.

Factors that lead to a Reduction of the Supply of Cash Reserves :
But the assumption of the causes of the SOFR Rate crises are not 100 % concrete, in which Economists and Analysts attribute to a couple different factors that were happening more or less in combination causing a drain of Supply of Cash Reserves in the Banking System.

Below are Factors that lead to a Reduction of the Supply of Cash Reserves

End of Quarter Reporting to clean up Bank Balance Sheets : at the end of the Quarter, banks like to clean up their balance sheet by removing any debt obligations or closing any related investment positions if they can to show more profitable strength on their balance sheet as they have to report to investors and markets at the end of the quarter and also for regulations reasons must have a certain minimum level of risk exposure. Banks and Financial entities at the end of the quarter are not uncommon for them to not lend as much in the SOFR Rate Market at the end of the quarter. Also, at the end of the quarter this is reflected in the SOFR Rate, as around this time is when it is most likely to differ from the Fed Funds Rate than any period during the year. At the end of the Quarter, SOFR Rate will usually just jump a little. But in September 2019 the Jump up in increase was excessively Huge.
Quantitative Tightening : From October 2017 to August 2019, the Federal Reserve implemented Quantitative Tightening. From the 2008-2009 Financial Crises, new Policy Tools were implemented. From the crises they implemented Quantitative Easing, which was the Federal Reserve Purchasing of Long-Term Bonds such as Long-Term US Treasury Bond Securities and Mortgage-Backed Securities from the market, in turn this provided Cash Reserves to the Banking System and Economy. Quantitative Tightening is the opposite of this where the Federal Reserve will sell these Long-Term Bonds from their balance sheet that they were holding, and now sell them to the market, and in turn Cash Reserves will come out of the Banking System and Economy. Quantitative Tightening is done when the Federal Reserve wants to Raise Interest Rates, which will help decrease inflation.
Corporate Tax Payment : the new Tax Rate decreases from the Trump Administration started to take effect starting in January 2018. Corporate Tax Rate was decreased to 21 % . This caused a lot of Large Corporations that used Loopholes to park their Cash Holdings in overseas locations to now bring back their Cash Holdings back to the United States because of the Lower Corporate Tax Rate. This caused a Large increase in Revenue for the US Government into the US Treasury, as Large Tax Payments were being made from Corporations. As any Cash is sent to the US Government’s US Treasury , this Cash is not sitting in the Banking System, which causes Less Cash Reserves in the American Banking System. Before as the Corporations held their Cash Holdings in overseas, they would use that cash to purchase US Treasury Government Bonds, but since now that portion of Cash is not used to purchase US Treasuries Bonds, this means there would be other buyers that would have to replace those Bond Sales, which also would have effect of decreasing Cash Reserves in the banking system to be lent for the overnight SOFR loan market.
US Banks & Brokers (Primary Dealers) increase of US Treasury Holdings : Primary Dealers are approved firms by the Government to be Counter-Parties and Market Makers for Government Securities like US Treasuries Bonds (Debt). Primary Dealers are made up of Large Capitalized Banks and Broker-Dealers. Right before the SOFR Rate Repo crises in September 2019, Primary Dealers reached an all time high in holding US Treasuries Bonds on there balance sheet at over $ 200 Billion Dollars (Look at Figure 4) .

(Figure 4 ) US Primary Dealer - US Treasuries Net Position
( 2015 - 2019 )

( Source : Federal Reserve Bank of New York )

They became a huge buyer of US Treasuries Debt than normally. How would this effect the Overnight SOFR Rate ? this would mean Banks and Broker-Dealers would allocate more Cash to buy US Treasury Bonds, this means they would allocate less cash to lend in the Overnight SOFR Rate Market, meaning they are decreasing there participation in the SOFR Rate Market, which means there is less supply of lenders in the SOFR Rate Market, which has the affect of increasing the SOFR Interest Rate. What Caused the US Primary Dealers to buy so much US Treasuries and have a large Net Position ? Well by there nature, since the Primary Dealers are Market Makers for US Treasuries when they get issued in the Primary Market, they have the legal obligation in being required to buy the US Treasuries in the Primary Market from the US Government and Resell them regardless of Market Conditions. There were a couple of factors that aided in leading less buyers from the general market, in which may caused the Primary Dealers to step in and buy more of the Portion of US Treasuries than usual.

- (1) Increasing National Debt : There was an increase in the US National Debt. The Trump Tax Cuts that went effect in 2018, would mean less government revenue coming in, in which more National Debt would be increased to continue the Spending Amounts. In order to increase the National Debt, this means New US Treasuries would have to be issued and sold, which causes more of the Cash from the Primary Dealers to be used to buy US Treasuries, and also other Market Investors would buy the US Treasuries as well. Any purchase of newly issued US Treasury Bonds is cash that is being sent to the Government's US Treasury, and not being inserted into the Banking System, which has a net effect of decreasing Cash Reserves in the Banking System, which means less cash reserves to be lent out to the Overnight SOFR Loan Market.
- (2) Increasing US 10 Year Treasury Bond Yield :
  If Investors fear that Inflation is increasing or being a problem in the United States, or if Interest Rates rises, this will cause the 10 Year Treasury Bond Yield to rise. Effecting the increase in the Yield were In 2018 the Federal Reserves was raising the Fed Funds Rate, and also there was from the Trump Administration effects of Trade Tariffs with the US Economy of the increasing costs of imported priced goods like from China, feared investors of not to buy US 10 Year Treasury Bonds, causing the US 10 Treasury Bond Yield to increase. Foreign Investors began to decrease their Purchases of US 10 Year Treasury Bonds, therefore needing other buyers such as US Primary Dealers to step up and buy US 10 Year Treasuries, which had the net effect of less cash reserves in the Banking System to be lent to the Overnight SOFR Loan Market.
- (3) Large Settlement of US Treasuries Long Term Debt on Sept.16th : In Addition there was also $ 54 Billion Dollars of US Treasury Debt that was being settled on Sept.16th, the day before the start of the crises. Long Term Debt is matured and settled , as new debt gets issued to replace maturing debt, the Primary-Dealers have to buy more New Issued US Treasuries, which further decreases the cash on hand, and which further decreases cash reserves in the banking system.
- (4) Primary Dealer using SOFR (Repo) Market to purchase US Treasuries : Primary Dealers were borrowing cash in the SOFR Rate Market to purchase US Treasuries. This further increased the Demand for Borrowing in the SOFR Rate Market, with the other already depleted Supply of Lenders in the SOFR Rate Market, which Drove Up the SOFR Rate , as Demand of Borrowers exceed the number of Supply of Lenders in the SOFR Market.
Bank Regulation & Minimum Reserves Requirements : During the SOFR Rate Crises, Interest Rates were so High, that it would be very profitable for a Lender to lend at those rates, which would ultimately lead to a lot of lenders jump into the market to get that advantageous profit, which would ultimately lead to the rates coming back down to the normal level. But that did not happen. The reason why some Banks did not do that is that some had stated that there are Regulation requirements that they have to follow about how much reserves to keep on hand, and also there are different accepted minimum reserve levels that each Bank has created for themselves based on their preference, some banks set their reserve levels higher, some set it lower, it’s based on each created procedure and rules of each bank. For these reasons, Some Banks had well enough Cash Reserves to enter the Overnight SOFR Loan Market, but for keeping minimum reserve levels, they did not enter the market.

( Source : Financial Times “repo crises brewing”, Financial Times “Repo: How Plumbing got blocked“, Yardeni Research , Fed Reserve “What Happened in the Money Markets in 2019” )

Current Similar Signs of SOFR Rate Crises in 2025
and Beyond ( US Repo Crises )

Current Increase Spikes in SOFR Rate

The SOFR Rate experienced a much more than usual Jump in increase in the First Week of October 2024. A large enough jump that it has dealers in the SOFR Rate market worried that another potential SOFR Crises can emerge again. In addition, this Large Spike Increase in the SOFR Rate was after Sept 18th, after the Federal Reserve decision to apply to decrease by 2 Cuts on the Fed Funds Interest Rate, to decrease the Fed Funds Rate by 50 basis points. From Sept 26 to October 1, the Fed Funds Rate remained at 4.83 %, but the SOFR Rate jumped from 4.83 % to 5.05%, a 22 Basis Point increase in 4 business Days. The Highest SOFR Rate Spike up since the SOFR Rate crises in 2019. This increase in the SOFR Rate is equivalent to erasing 1 Cut from the Federal Reserve decision to lower the Fed Funds Rate, itis reversing nearly 1 cut which is equivalent to 25 Basis Points (0.25 %), SOFR Rate increased by 22 Basis Points (0.22 %) that day. 3 days later on October 4th,the SOFR Rate decreased back down to the level of 4.83 %, the same as the Fed Funds Rate. Look at figure 5 below.

Fed Funds Rate & SOFR Rates (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 5)

( Source : Federal Reserve Bank of New York )

Again in December, the SOFR Rate jumped over 20 Basis Points Higher than the Fed Funds Rate, SOFR Rate at 4.53 % and Fed Funds at 4.33 % . This happened again after the Federal Reserve Interest Rate cut which was on December 18th, which lowered the Fed Funds Rate to 4.33 % . The SOFR Rate jumped in total 23 Basis Points from 4.30 % on December 19th to reaching 4.53 % on December 26th. Again this increase in the SOFR Rate of over 20 Basis Points is equivalent to reversing the Interest Rate Cut that the Federal Reserve did on December 18th. ( Look at Figure 6 )

Fed Funds Rate & SOFR Rates (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 6)

( Source : Federal Reserve Bank of New York )

Throughout the remaining of December the SOFR Rate remained a significant large amount higher than the Fed Funds Rate, but by January the SOFR Rate came back down to the same levels of the Fed Funds Rate.( Look at Figure 7 Below )

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
( Figure 7 )

( Source : Federal Reserve Bank of New York )

Quantitative Tightening

The Federal Reserve has been implementing Quantitative Tightening since June 2022, and is continuing todo so right now. Due to the Monetary Stimulus that was done after Covid, which increased the huge amount of Money Supply and Cash Reserves into the Banking System through Quantitative Easing. Due to the huge inflation increase since then, in order to reduce inflation in addition to having raised the Fed Funds Rate, they are applying Quantitative Tightening, which in effect decreased the amount of Cash Reserves in the Banking System. Since the beginning Quantitative Tightening near of June 2022, the Federal Reserve has reduced its Balance Sheet by around $ 2 Trillion dollars, meaning they have sold off nearly $ 2 Trillion Dollars of its holdings of Long-Term Bonds into the market ( US Treasuries Bonds, Mortgage-Backed Securities ). During the Covid pandemic they also purchased some short-term bonds for their holdings, so they sold off a portion of short-term bonds as well. While they have been conducting Quantitative Tightening since June 2022, at the same time starting in September 2024 they began to Cut and lower the Fed Funds Rate. These two actions are in opposite Effects of each other, Quantitative Tightening purpose is to Reduce Cash Reserves in the Banking System and Raise Interest Rates in the Economy, but Cutting and lowering the Fed Funds Rate purpose is to Increases Cash Reserves in the Banking System and Lowering Interest Rates in the Economy. There will be a point when the Federal Reserve decides to stop Quantitative Tightening, but as of right now they are continuing it, and what is unique about this current round Quantitative Tightening is that they are doing it when they are lowering the Fed Funds Rate.

(Data Source : Federal Reserve )

Banking System Cash Reserves are not decreasing with Quantitative Tightening

Since the Federal Reserve began Quantitative Tightening in June 2022, and up to presently of the latest data of January 2025, Total Bank cash reserves have not changed roughly at all. In June 2022,Total Bank cash reserves were $ 3.22 Trillion , in January 2025, Total Bank cash reserves were $ 3.25 Trillion, Look at Figure 8 below .

Total Bank Reserves in US Banking System
( Figure 8 )

This is unlike the Quantitative Tightening that was leading right before the SOFR Rate Crises of 2019, where the Quantitative Tightening lead to a substantial amount of decreased Bank Reserves. The Quantitative Tightening that led before the 2019 Crises decreased the Bank Reserves at a Faster pace. Researchers at the Federal Reserve Bank of St. Louis issued a research analysis of some of the reasons why the actual Bank Cash Reserves did not change since the start of Quantitative Tightening began in June 2022. A prime reason is because during mostly through this time period , the Yield for Long Term Bonds like the US 10 Year Treasury Bond are lower than the Yields for Short Term Bonds and short-term interest accounts. In other words, an Inverted Yield Curve. Banks have the option to deposit their reserves in the IORB Rate (Interest On Reserve Balance) account, which is a Deposit Account at the Federal Reserve, where the Federal Reserve will pay them an interest rate overnight, if they deposit their reserves in the Account. If the Yield Curve is inverted, meaning the interest rate return on Short Term Bonds and Short Term Interest Accounts like the IORB or Fed Funds Rate is higher than the interest rate on Long Term Bonds like the US 10 Year Treasury Bond, than the Banks have a more incentive to not to purchase into US 10 Year Treasury Bonds, and rather use their reserves to deposit into the Overnight Interest Rate deposit account of the IORB Rate or lend in the Overnight Loan market like the Fed Funds Rate. For example, in 4th Quarter of 2023 the IORB Rate was 5.40 %, versus the US 10 Year Treasury Bond Yield at 4.45 %. Currently the IORB Rate is 4.40 %, and the US 10 Year Treasury Bond Yield is at 4.26 % as of Feb 26 . It is more advantageous for the Bank to deposit there reserves and get a higher return with the IORB Rate, rather than purchase US 10 Year Treasury Bonds. As a result, this has increased reserves in the banking system, while offsetting the depletion of the reserves from Quantitative Tightening.

(Source : FRED , Federal Reserve Bank of St. Louis , Federal Reserve , TradingEconomics )

Primary Dealers at All Time High in US Treasuries Net Positions

Similarly as experienced in 2019 when SOFR Repo Crises happened, currently Primary Dealers have an all time high in holding US Treasuries Net Positions. Data as reflected as of February 5, 2025 shows Primary Dealers have a US Treasuries Net Position of $ 370 Billion, this exceeds the previous all time high that was reached in 2019 at around $ 200 Billion ( Look at Figure 9 ).

( Figure 9 ) US Primary Dealer - US Treasuries Net Position
( 2022 - 2025 )

(Source : Federal Reserve Bank of New York)

Risk Factors in SOFR Rate Crises appearing in 2025 and Beyond

Many of the same conditions leading up to the SOFR Rate Repo Crises in 2019, are currently here but even more stronger. There was a unique event of Corporate Tax payment that was due on Sept.16th, that flushed out Cash from the banking system, but all the other factors today are showing……..Quantitative Tightening, Primary Dealers all time high of net positions of US Treasuries, large end of quarter spikes in SOFR Rates, and large settlement of US Treasuries debt due in 2025.

An Over-Arching difference between now and when the SOFR Rate Repo Crises happened in 2019 is that back then inflation was low, and the risks of future higher inflation was very low. Post Covid Pandemic, today, Inflation is much higher, and the risks for continuing higher inflation is much stronger. Historically, Interest Rates rise higher in a inflation environment versus a non-inflationary environment. By this very fact, its more likely that the SOFR Rate will increase than compared before. The setup of the current economic environment further makes it much more likely that a SOFR Rate Crises is much more able to happen today than compared to the previous one, and in higher Magnitude.

Because of the current Economic Environment, the risks of the US 10 Year Treasury Yield of Increasing is much higher than what it was in the previous SOFR Rate Crises. A Higher US 10 Year Treasury Yield may drive the typical buyers of US Treasuries away, causing the primary dealers to increase there already all time record high US Treasuries net positions, thus flushing out Banking System Cash Reserves.

Federal Reserve - Policy Error (Credibility Risk) : Since the Federal Reserve began the first Fed Funds interest rate cuts in September through December, for a total of 4 interest rate cuts, or 100 basis points (1 % ) , the long term interest rates in the Economy has went upwards, in effect this is the opposite of what is suppose to happen. As you can see in figure below. The 10 Year US Treasury Yield increased from 3.65 % the day before the first Interest Rate Cuts in September 18th, to currently 4.26 % as of Feb.26 ( Look at Figure 10 ) . There were no interest rat cuts needed, as inflation has increased and far from the Federal Reserve Inflation of 2.0 % Target, as both the inflation rates are not near, as the Core CPI is currently 3.3 % for January 2025, and latest Core PCE Inflation Rate at 2.8 % for December 2024. Even through the time of Higher Interest Rates, the Money Supply in the Economy has been increasing, any effects of lower short term interest even if temporary would spill over in flows to riskier assets try to gain higher returns, further adding fuel to the Money Supply in the Economy, driving Inflation Higher. There is a real threat of Credibility Risk of the Federal Reserve from the Financial Markets. By cutting interest rates when it did not need to, if Inflation continues to increase higher, the market will feel low confidence in the Federal Reserve in controlling Inflation, which may cause less buyers of the 10 Year Treasury Bond, causing the 10 Year Treasury Yield to increase significantly. It could cause exasperated increases in interest rate markets in very short span of time, causing large increase spikes in the SOFR Rate and Fed Funds Rate, causing large reductions in Bank Cash Reserves in the banking system.

US 10 Year Treasury Bond Yield ( Figure 10 )

( Source : TradingEconomics )

Trump - Trade Tariffs - Impact : The Trump Administration already has implemented or plan to implement Trade Tariffs. The huge difference between now and during Trump Administration first term is the High Level of Tariffs in this second current term that they plan to implement. The Tariffs effects in the second term if implemented is way more Impactful than first term, as they wider in scope of number of countries and considered to be possibly universal meaning all countries, and at high rates. This is what was underestimated by financial markets when Trump won the election in November, and Markets went higher, is that even if a quarter of what is proposed materializes for the Tariffs of what Trump campaigned on the election, it would be extremely detrimental to the US Economy. It was very misleading for Markets to act so positively after he won the election, really acting as ignoring the fact of any tariffs would be implemented at all. As of Right now, there is a 10 % Tariff on China for packages over $ 800 dollars. Canada and Mexico Universal Tariffs meaning all goods are set to start March 4th, and Universal Tariffs of 25 % on Aluminum and Steel on all countries are set to start March 12. Now of course until those dates happen, before then there could be negotiations between the US and the countries in that the Tariffs may not happen and be cancelled or they maybe a compromise such as reduction of the Tariff Rate or amount of goods. But as the Trump Administration is planning to collect revenue from tariffs and use it as a key revenue generator and the belief of Tariff Policy being the main Hallmark of the Trump presidency, Tariffs of strong scope are likely to be implemented. Implementing Tariffs right now in the US Economy could not come at a Worse Time, as Inflation has remained sticky and been increasing. Conventional Economics state that Tariffs are inflationary, so any implementation will increases of goods and services in the economy. A Tariff is a tax to the domestic producer for buying imports, in which the producer will pass it on to the consumer by increasing the price of the good. As a higher tax rate will increase the price of the good, by its nature a tariff is inflationary. As Tariffs get implemented in the economy, the market Inflation Expectations will increase driving the US 10 Year Treasury Yield higher and increasing interest rates. At the same time, since a Tariff is a Tax, the Domestic Producer paying the tax on the import will have the affect of cash reserves being sent out from the Banking System into the Government Treasury Account, thus reducing available Supply of Bank Cash Reserves in the banking system.

The Psychological Level of 5 % on US Ten Year Treasury Yield and impact on Banks Cash Reserves : If the US 10 Year Treasury Yield reaches and sustains above 5 %, this can cause multiple changes in markets. For one, it is a market level that psychologically that has not been reached and sustained above for quite some time, the last was in June 2007. Throughout the post covid pandemic Inflation Peak of 9 % in June 2022 and afterwards, the US 10 Year Treasury Yield did not reach 5 %, except in October 2023 where it reached 5.02 %, but than quickly retraced below afterwards. A US Economy and Financial Markets that have been so used to low to 0 % percent interest rates for 14-15 years since the Housing Bubble & Financial Crises in 2008 there sentiment is with shock when hearing the possibility of 5 % interest rates and higher, although historically 5 % is quite the norm in the US Economy.

If the 10 Year Treasury were at 5 % Yield and Higher it would make it more expensive for long term loans in the economy like Mortgages for borrowers as the interest will be higher, but a 5 % and Higher Yield on the 10 Year Treasury may directly impact Short Term Overnight Rates like the Fed Funds Rate, IORB Rate , SOFR Rate. For Example the IORB Rate is currently 4.40 %, and Fed Funds Rate is 4.33 %, and the SOFR Rate is at 4.33 % . If the US 10 Year Treasury Yield is lets say at 5.50 %….., why would a Bank or Financial Institution lend at the Fed Funds Rate, SOFR Rate, or deposit at IORB Rate, when it can get a much Higher Return in Buying a US 10 Year Treasury Bond with a Interest Rate Yield at 5.50 %……? The answer is they would likely not lend in the overnight rate markets or deposit , and they would likely buy the US 10 Year Treasury Bond for the Higher Investment Return. This type of scenario can have some very big market spillovers in overnight rate markets, especially if the US 10 Year Yield increases by very large moves and much higher than a 5 % Yield. It could cause a reduction of Bank Cash Reserves in the banking system.

If the US 10 Year Treasury Yield reaches a certain level (e.g., 5 %, 6 %, 7 %) and is higher than IORB Rate or Overnight Loan Market Rate (Fed Funds Rate or SOFR Rate ) by a very significant amount, banks and other financial institutions instead of depositing their reserves at the IORB Rate with the account at the Federal Reserve, or lending in the Overnight Fed Funds Market or SOFR Rate Market, will take their reserves and purchase US 10 Year Treasury Bonds, because the Interest Rate is much higher than the IORB Rate or Fed Funds and SOFR Rate, which would result in a reduction of Cash Reserves in the Banking System, which would mean less Cash Reserves to be lent out in the overnight SOFR Rate Market, causing the SOFR Rate to potentially sky rocket upwards like it did the previous SOFR Rate Market crises.

(Source : Federal Reserve, TradingEconomics, Federal Reserve Bank of New York Markets Data Hub , Reuters , Bloomberg )

Disclaimer :
Paraimbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of Paraimbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate in a futures trading program, pool or securities.

Paraimbal, LLC as a Commodity Trading Advisor and Commodity Pool Operator, and I may have positions in related Investments (futures and options contracts) discussed in this report, and Paraimbal, LLC clients and including participants in the pool(s) that I operate, may hold positions referenced in this Report. Paraimbal LLC on behalf of its clients, and participants, and I may potentially exit positions on the related investments (futures, options) positions after publication of this report. This creates a potential conflict of interest. Past performance is not indicative of future results. The risk of loss in trading futures and options can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. You should consult with your financial advisor or other professionals before making any investment decisions. Paraimbal, LLC and I accept no liability for any loss or damage arising from reliance on the information contained in this report.

Back to Blog

Fed Funds Rate does Not need to be Lowered (it's a Market Charade)

9/17/2024

By Asseged Major

There has been a Charade in High Gear the last couple of months in Financial Markets, to push the False Assumption that the US Economy is weakening and heading to a recession in order to obtain Low Interest Rates from the Federal Reserve Policy at the Fed Funds Rate. In the Start of the year the pricing in the Markets was extremely high pricing at 7 Interest Rate Cuts , than 1 to 2, and now back up 4 to 6 Range. Markets do go into phases of irrational thinking of overpricing and underpricing, and those cane be advantageous for Investors to take advantage against the Market. But over the last couple of months the amount of Misleading Assumptions and Bias has been extremely exacerbated. This is particularly important if there are the possible effects of an actualization of Interest Rate Cut(s) that are not needed for an already warm Expanding Economy, which can further Escalate Inflation and make it worse. Below is the overwhelming evidence that no interest rate cuts are needed (in fact strong case for it being raised), and the recent claims that are pushed through headlines which are weak in merit.

Claim : the Job Market is weakening and the Economy is heading to a Recession

On August 2nd, the July Jobs Report came in at + 114,000 , it did come in under the forecasted amount + 176,000 , but + 114,000 is typically considered an okay to good jobs number for a month. It ultimately did get revised to a decrease -23,000 Jobs, to a total of + 89,000 Jobs added for July (More on Larger Revisions later). This is not a recession level indicating a number where it would be actually Negative, even with that it would have to happen for consecutive or multiple months. Moreover, a reason, some Economists said it came in less than forecasted, is because the timing of the Natural Disaster in the South Region “Hurricane Beryl ” which happened in early July, correlated with a Huge Increase in Temporary Layoffs of Workers for July, which is counted as unemployed for the month of July. But it is temporary, and these workers will be called back to work, and if called back in August, can be recaptured for the job data for August. August Jobs Report came in at + 142,000 Jobs added (non-revision).

By looking at the Job Numbers for 2024 so far (Table 1), out of the 8 Months reported, 4 Out 8 were above 200,000 Jobs added. The Federal Reserve Long Term Equilibrium Target for a normal market in the Economy is between 70,000 - 90,000 Jobs added per month. Recent Jobs Numbers are still substantially above the Federal Reserve Long Term Equilibrium Targets, and they just reflect a more return to more normalizing values. This is nowhere near a Job Market that is showing signs of weakening and giving indications of a Recession !....., This is quite the overaction of the Financial Markets and quite dumbfounded. The data portrays quite the opposite, a relatively stable and strong Job Market.

(US) Non-Farm Payroll Report - Monthly Jobs Added (Table 1)

( Source : Bureau of Labor Statistics, Federal Reserve Bank of San Francisco )

Claim : Revision of Jobs Reduced 2.9 Millions Jobs Created to 2.1 Million Jobs

The Bureau of Labor Statistics publishes a revisions report for 12 Month rolling job data from March of last year to March of this year. They published this report in August. When this Report came out on August 21st, the Revision was larger than normally. There was an 818,000 decrease in Jobs that was revised on their report from March 2023 to March 2024. In total for that period, it went from 2.9 Million Jobs created to the revised 2.1 Million Jobs created. The average monthly Jobs Added went from 242,000 Jobs added per month to a revised 174,000 jobs per month. But for this time, this latest published Report is Quite Misleading ! . The last 2 years there has been a much larger migration of immigrants into the population than normal, there has been an estimated 3.3 Million immigrants that entered into the Population between 2023 and up to as of date in 2024. Out of this, the CBO estimates 1.3 Million are undocumented immigrants. The BLS Revision of the Jobs Report is based on counting workers that pay Unemployment Insurance (UI), the undocumented immigrant workers are not covered by Unemployment Insurance (UI), so therefore the BLS Revision Report is leaving out Undocumented Immigrant Workers from their Jobs Data. When taking into account Undocumented Immigrant Workers , the revision of the BLS Jobs Data reduction is likely a lot less. A report from Goldman Sachs estimates that when counting Undocumented Immigrant Workers, the revision would likely be just a reduction estimate of 300 K jobs, instead of 818 K Jobs. This would equate to a reduction of 25 K jobs a month from the Original Jobs Data for this period (March 2023 to March 2024). In other words, the estimate when counting undocumented workers, that there were around 2.6 Million Jobs created in this period instead of 2.9 Million, and there were between an Average Monthly Jobs added between 215 K to 220 K jobs a Month in this period, instead of 242 K Jobs per month. This is larger and a much more accurate number than what was reported of the revision of the BLS at 174 K Jobs added a month and 2.1 Million Jobs for the period. Also, even though the Revision Report of 174 K jobs a month is inaccurate, to give context in that level, which was around the average number of jobs added in 2019 before the Covid Pandemic in which the unemployment rate was also at around historical low level at 3.5 %. So even with that number, which is inaccurate, that gives you context of the quite strong labor market historically.

( Source : Bianco Research , Federal Reserve Bank of San Francisco )

US Economy Continuing Solid Positive Growth

On top of this, the current overall US Economy is not reflecting an economy that is slowing and is heading into a recession. The US Economy is showing quite the opposite in this as well. For Quarter-to-Quarter Growth, in the 1st Quarter it grew + 1.4 % growth, and in the 2nd quarter it grew + 3.0 % . To give you context the current 10 Year Real GDP Growth Average is about 2.0% . On an Annual Growth basis, the 1st Quarter GDP Growth was 2.9 % and 2nd Quarter GDP Growth was 3.1% . Current data received so far for the GDPNow Estimate by the Federal Reserve Atlanta Bank of Atlanta Released today Sept.17th, show another + 3.0 % GDP Growth for the ongoing 3rd Quarter. These are not values that the US Economy is showing to be or shown to be in a recession ! it is showing literally the opposite in displaying very good GDP Growth ! an Economy that is continuing to Expand at a very good growth rate !

US GDP Growth (Table 2)

( Source : Bureau of Economics , Federal Reserve Bank of Atlanta GDPNow , Date : Sept.17 , 2024 )

US Consumption Continues to Grow

The US Economy is majority based on Consumption, 67 % of US GDP is based on Consumption. The recently released Consumption data by the BEA also includes the first month of 3rd Quarter, which is the July data. It is showing a continuation of strong consumption data for the US Economy as Macro Financial Researcher “ Wolf Ritcher ” points out. Consumer spending adjusted for inflation increased 0.39 % from June to July. This is a continuation of strong consumption growth from May and June. The 3 Month average growth from May to July, increased also by 0.39 % , this is the highest growth since February 2023 and second highest since November 2021. On an annualized basis this three-month growth adjusted for inflation is 4.8 %, meaning 4.8 % higher than last year at the same time . Year over Year, July Consumer Spending growth grew 2.7 %, which also was the same for May and June. For each of these 3 months, it was the highest Year over Year growth rates since November 2023 and February 2022. ( Source : BEA, Wolf Ritcher )

Inflation Rate

Two categories for inflation readings are the Nominal Inflation Rate and the Core Inflation Rate. The Nominal Inflation Rate includes the volatile Food and Energy prices, the Core Inflation Rate takes out and excludes the volatile Food and Energy prices. For that reason, Interest Rate policy by Government Central Banks put a much heavier weight on the Core Inflation Rate Statistic. The target that most developed countries Government Central Banks target Inflation for is a 2.0 % Core Inflation Rate.

The CPI Inflation Rate is the inflation rate that is most valued in Financial Markets it is released during the first week of the following month, and most world Central Banks use the CPI Inflation Rate, and it has a set basket of goods that are used. The Federal Reserve in addition also uses the PCE Inflation Rate statistic to target Inflation Rate. This Inflation allows substitution, meaning if a basket of Goods is substituted, for example if a food item Chicken has increased in price, it can be substituted with the Beef which is a lesser price item, consumers may have switched to beef because it’s a lesser price item, the price of Beef may have increased but at a lesser rate than the Chicken Food item. The PCE Inflation Rate comes out much later than the CPI, during the end of the month and usually has less impact on Financial Markets, on average there usually is a .04 % difference between the two inflation statistics, where the PCE Inflation Rate is usually .04 % lower than the CPI Inflation Rate.

The CPI Inflation Rate latest reading for August in the United States was a 3.2 % Core Inflation Rate, and a 2.5 % Nominal Inflation Rate. The Nominal Inflation Rate has experienced decrease due to the current lower oil prices at the moment, but could possibly quick change of its ability to be volatile. The latest reading of the PCE Inflation Rate, which is for July, produces a Core PCE Inflation rate of 2.6 %, and a Nominal PCE Inflation Rate of 2.5 % . Both Core Inflation Rates have not decreased enough to reach the Federal Reserve 2.0 % Inflation Target level. Look at table 3 below,

CPI Inflation and PCE Inflation ( Table 3 )

The Core CPI Inflation Rate is 3.2 % as of August 2024. It has roughly been the same the last 3 months, and has not changed the last 2 Months, Look at Table 4 below,

Core CPI Inflation ( Table 4 )

The PCE Core Inflation Rate has stayed the same at 2.6 % for 3 consecutive months, from May - July. Look at Table 5 below,

Core PCE Inflation ( Table 5 )

The Nominal PCE Inflation Rate in February was 2.5 %, and the latest reading of July is 2.5 % . It experienced higher levels and decreased, but overall, it has meant it has returned back to the same level in February 2024 in the latest reading of July 2024 (as noted, a change in volatile oil prices and food can quickly change it back to the core inflation rate) . Look at Table 6 below,

Nominal PCE Inflation (Table 6)

( Source : TradingEconomics )

Services Inflation Remains High

As reported in the CPI Services Inflation report, the United States Service Inflation for August is 4.90%. This far exceeds the 2.0 % range where it has been mostly for the past 10years , Look below at Chart 7 ,

US Services Inflation Rate (CPI) - Chart 7

As for reported in the Core PCE Services Inflation Report, the Services Inflation accelerated from 3.72 % in the month of July.
( Source : BEA )

Rent Inflation remains High

Rent Inflation for August 2024 was 5.2 % in the United States. This also exceeds the 3.0 % Range where it was for the past 10 years. Look at Chart 8 Below,

US Rent Inflation (CPI) - Chart 8

Corporate Borrowing continues to Increase

Corporate Borrowing has been continuing to increasing despite a Higher Feds Funds Rate ! . As of August 2024, a + 31.3 % Year over Year increase at $ 1.34 Trillion, Look at Table 9 below,

US Corporate Loans (Bonds) New Issuance - Table 9

Data : SIFMA (Securities Industry and Financial Markets Association)

Despite where a Higher Feds Fund Rate, the Spread for Corporate Bond Yields minus US Treasury Bonds, are at the Historical Low Range Levels ! . Currently the Spread of Investment Grade Corporate Bonds minus US Treasury 10 Year Bond is (0.96 %). This is at the very low end range historically. The same is being shown For Junk Bond Yields (High Yield) , which are more risky Corporate Bonds. The current spread for Junk Bonds (High Yield) minus US Treasury Bond is (3.32 %) . Look at Charts 10 & 11 Below,

US Corporate Investment Grade Bonds Yield Spread
( US Corporate IG Yield - US 10 Year Treasury Yield )
Chart 10

US Corporate Junk Bonds Yield Spread
(US Corporate High Yield - US 10 Year Treasury Yield)
Chart 11

Corporate Loans (Bonds) are showing the Fed Funds Rate is not Restrictive !

It begs the question, How can the Feds Funds Rate be restrictive when the Corporate Bond Loans continue to make Year over Year Large increases, and the Spread for Corporate Bond Yields to US Government Bonds are in the Historical Low Range Level ???

Money Supply in the US Economy is Increasing

Underlying this inflation picture, the United States Money Supply (M2) has continued to increase since October 2023, and it has reached in July 2024 to $ 21.1 Trillion Dollars. This has been the highest Money Supply Level since 17 Months ago ! . Look at Chart 9 and Table 10 below,

US Money Supply (M2) - Chart 9

(Source : TradingEconmics.com)

Table 10 - Money Supply (M2)

(Source : TradingEconomics)

Meaning the Money Supply level in July 2024 has increased to near a level of what it was in February 2023, when the Federal Reserve was continuing to raise Interest Rates Higher. This is actually quite an alarming statistic, the purpose of the Federal Reserve by raising interest rates was to decrease the Money Supply to get rid of inflation. The Federal Reserve last raised the Feds Funds Rate in July 2023 and held it there, But in sum in the last 10 Months the actual Money Supply has increased Higher than what it was before July 2023 !, to the level of what it was in February 2023 while they were still raising rates ! .

This has caused the level of the Inflation Rate to act the way it is remaining sticky and elevated, and furthermore it supplies even more pressure for Inflation to increase going forward. The Federal Reserve target is to have a 2.0 % Core Inflation Rate before they attempt to cut interest rates. Clearly both Core Inflation Rates for the CPI and PCE are not at the 2.0 % Range, Core CPI showing 3.2 % , and Core PCE at 2.6 % . Added that there is an Increase in the Money Supply, this clearly shows any cutting of interest rates would fuel the money supply, and further heat up the US Economy with consumption and further escalate the Inflation Rate.

What does this Really Mean for the Feds Fund Rate, Interest Rates and for the Economy ?

Markets have some reasons to be volatile. It is the presidential election coming up, and the Federal Reserve has stated that the next Interest Rate Decision(s) is heavily data dependent. Fed Reserve Chairman Jerome Powell did give a very surprisingly Extra Dovish Tone to potentially lower interest rate sat Jackson Hole Wyoming meeting on August 23rd , there was nowhere in the speech it was a guarantee to lower interest rates and the timing of it like the market is pricing. That being said the Fed Reserve should of understood now based on what was exhibited from the early part of the year, if you give the Market 1 Inch, they will ask for 1 Foot, the Market has been wrong the Entire Year, the extreme amount of interest rate cuts from 7 to 1, back to now 4 to 6. What has stayed consistent throughout the process is the overwhelming Economic Fundamentals of the Overall Expanding Economy, and Strong Consumption, and Sold to Strong Job Growth, and the evidence of Core Inflation Still Very High. Add the mix of an Increasing Money Supply and increasing year over year Corporate Loans(Bonds) and historical low spreads. Do any of this sounds like the Fed Funds Interest Rate needs to be Cut ?? No, it does not, it sounds like and showing Quite the Opposite. Not only this shows there should not even by 1 Interest Rate cut right now, it leads to that the Feds Funds Rate is not Restrictive actually…., meaning it actually is not High Enough !!, it leads for the Fed Funds Rate to be raised, or at minimum for Interest Rates in the Capital Markets to be Higher. One thing for sure is that if Market receives what they want for the Fed Funds Rate at the low levels they are pricing it for, Consequences for Higher Inflation will Take Off Jumping !!!

Back to Blog

Natural Gas and its Rare Price Levels

3/24/2024

By Asseged Major

Natural Gas Prices - Low Prices

Natural Gas Prices are currently trading at around multi-record low prices. Natural Gas Prices have tested similar record lows throughout different years, trading below $ 2 Range. During the Covid Outbreak the spot Natural Gas Price reached low of $ 1.42 . On March 13th, Natural Gas Price reached below this level at $ 1.25 . Currently the spot Natural Gas Price is trading at around $ 1.55 ( Look at Figure 1 ) .

Figure 1 – Daily Average Spot Price of Natural Gas (Henry Hub)

( Data : EIA , as of 3/20/2024 )

What is Causing Natural Gas Prices to Decrease ?

2 Main areas are causing Natural Gas Prices to decrease , it is .....

- Mild Winter Weather ,
- US Record Oil & Gas Production in 2023

Mild Winter Weather

US is biggest Producer and Consumer of Natural Gas in the World

The United States is the Biggest Producer and Consumer of Natural Gas. The United States both for Production and Consumption have a World Market Share of over 20 % , which is the Highest. The Second in this category is Russia, which is below in the double digits, then after Russia all the other countries are in the single digits for world market share for Production and Consumption. The United States market has a significant size influence in the Natural Gas Market ( Look at Figure 2a and 2b ).

Figure 2a - World Natural Gas Production

Figure 2b - World Natural Gas Consumption

( Data : BP Statistical Review of World energy 2022, Data Year : 2021 )

Warm Winter Increasing Natural Gas Inventories

• In the United States Natural Gas is used in a wide variety of ways as a source of energy. In the United States, the Primary uses are in Electricity Generation and Heating. In terms of a heating source energy, 52 % of US Households use Natural Gas for Space Heating.

• Thus Far in the US Winter season (Nov - March), It has been a mild winter temperature season. In the United States there has been 8 % fewer heating degree days than the 10-year average .

• The warmer winter temperature has caused US Households to use less heating than normally, which has decreased their heating utility bills for this winter season. For the completion of the Winter season, the EIA expects the calculated consumption of Natural Gas to be about 3 Billion Cubic Feet per day, which is 9 % less than the previous 5 Year Winter Average. Because of the warmer Winter season, there is less consumption of Natural Gas, this is one of the reasons that has led to an increase in Inventories of Natural Gas.

• The EIA expects for the completion of the Winter season (Mar 31), that inventories will total 2.31 Billion Cubic Feet, which is 41 % above previous 5-year average for the month of March. This increase in inventories has caused a substantial increase in the Supply of Natural Gas in storage, which has decreased the price of Natural Gas .

( Data : EIA , EIA SEO, EIA Nat Gas Weekly )

US Record Oil Production in 2023

Natural Gas is also produced as a by-product from the Oil Production Process. When Oil is extracted from the ground, it often contains Natural Gas. From the process of Oil Extraction, more Natural Gas can be produced. The increase in Production of Oil, the increase in Supplies of Natural Gas.

In 2023, the United States produced a Record Amount of Crude Oil. In the United States, Crude Oil was produced at an average of 12.9 Million Barrels per day which is a record high, surpassing the previous record in 2019 at 12.3 Million Barrels per day. This is the Highest Production of Oil per day for any country in the world in History. Second was Russia at 10.1 Million Barrels per day, and third was Saudi Arabia at 9.7 Million Barrels per day, Look at Figure 3 .

Figure 3 - Average Crude Oil Barrels produced per day by Country ( in Millions of Barrels per day )

( Data : EIA , International Energy Statistics )

US is Largest Oil Producing Country in the World

Since 2018, The United States has been the largest Oil Producing Country in the world, exceeding Russia and Saudi Arabia, Look at Figure 4.

Figure 4 - Oil Production by Year

( Data : EIA , International Energy Statistics )

Fracking Increased US Oil Production

This has been due to the increase in Oil Production from Shale Oil using Hydraulic Fracking from the last 15 - 20 years. Hydraulic Fracking technology uses high temperature liquid pressure to extract Oil from Shale rock sediment. The percentage of US Oil produced from Fracking (tight oil) has increased at exceptionally Large rate within the last 15 years, in which currently as of 2022, the majority of Oil produced in the US is from fracking, in which 66 % of all Oil Produced in the United States is from Fracking, Look at Figure 5 .

Figure 5 - Fracking

( Data : EIA, USAFacts )

US Record Natural Gas Production in 2023

In 2023, the United States produced a Record High Amount of Dry Natural Gas. In the United States, Dry Natural Gas was produced at an average of 102.2 Billions of Cubic Feet per day in 2023, which is a Annual record high. In December of 2023, Dry Natural Gas reached an all-time High Record for production in a month at 105.5 Billions of Cubic Feet per day. Look at Figure 6.

Figure 6 - Average dry Natural Gas produced per day in US ( in Billions of Cubic Feet per day )

( Data : EIA )

Europe Dependency on Russia Energy Imports

The European Union (EU) countries import at about 55 % of its Energy, and at the end of 2022 it reached 62.5 % ( Data : Eurostat )

Europe Sanctions on Russian Crude Oil and Natural Gas

From the Russian invasion of Ukraine started in February 2022, and the war, which is still ongoing, the European Union (EU) have put sanctions and made efforts to decrease imports of Crude Oil and Natural Gas from Russia to European Countries. This is a very impactful change in Europe Energy Trade, as Russia was the leading Trading Partner of Crude Oil and Natural Gas to Europe.

Europe Oil Trading Partners, Before vs After ( Russian invasion of Ukraine )

Before the invasion, at the End of 4th Quarter 2021, the biggest Petroleum Oil Trading Partner with the European Union (EU) was Russia at 27 %, and the United States at 8 % . After the Russian invasion of Ukraine in February 2022, Sanctions, and efforts of using other Trading Partners from the European Union took effect, by the end of 4th quarter 2023, the biggest Petroleum Oil Trading Partner was the United States at 15 %, than Norway at 11 %. Russia was cut down to a very tiny fraction to 3 % ( Look at Figure 7 ).

( Figure 7 )

Europe Oil Trading Partners , Before vs After ( Russian invasion of Ukraine )

( Data : EuroStat )

Europe Natural Gas Trading Partners, Before vs After ( Russian invasion of Ukraine )

As assumed, the same scenario has played for imports of Natural Gas for the European Union. Before the Russian invasion, at the End of 4th Quarter 2021, the biggest Natural Gas Trading Partner with the European Union (EU) was Russia at 33 %, and the United States at 12 % . After the invasion, the biggest Natural Gas Trading Partner was the United States at 22 %, then Norway at 21 % , and Russia reduced to 13 %, ( Look at Figure 8 ).

( Figure 8 )

Europe Natural Gas Trading Partners, Before vs After ( Russian invasion of Ukraine)

( Source : EuroStat )

Increased US Exports of Oil and Gas to Europe

For both Oil and Natural Gas, the United States has doubled its share of imports as a Trading Partner with the EU within 2 years, and Russian imports to the EU have been drastically reduced. The European Union has looked to other countries to purchase Oil and Natural Gas imports with the United States being the largest seller to replace Russia for Oil and Natural Gas. This has caused US Oil and Natural Gas Producers to increase the supply of Oil and Natural Gas to record levels to meet the buyer demands from the European Union (EU) countries, in addition to domestic demands.

Largest Share of US Exports of Crude Oil is going to Europe

For the Full Year of 2023, US Crude Oil Exports have reached a record high at 4.1 Million Barrels per day. The largest share of those Crude Oil Exports is going to Europe at 1.8 Million barrels per day, Look at Figure 9.

Figure 9

( Data : EIA , Petroleum Supply Monthly )

US Largest Exporter of Liquified Natural Gas to Europe

For the Full year of 2023, the US exported the most in Liquified Natural Gas to Europe at 7.1 Billion Cubic Feet per day, this is around 200 % increase from 2021 when the United States was exporting 2.4 Billion Cubic Feet per day to Europe, Look at Figure 10 .

Figure 10

( Data : EIA , CEDIGAZ , GIIGNL )

Spread : Brent Crude Oil Price - WTI Crude Oil Price

Brent Crude Oil : Globally, Brent Crude Oil price is used as a benchmark to price over 3/4ths of traded Oil in the world. Brent Crude Oil is produced in the Northern Sea off the shores in Europe. Its efficient transportation location makes it convenient for delivery to other parts of the world and has lower transportation costs . (Data : ICE)

WIT Crude Oil : In the United States, WTI Crude Oil Price (Western Texas Intermediate) is used as a Benchmark to price Oil. WTI Crude Oil is produced in the Permian Basin in West Texas and parts of New Mexico. Its transportation costs are more expensive for further distance locations in the world due to shipping of WTI Crude Oil coming from on land locations.

Oil Type : Both Brent Crude Oil and WTI Crude Oil are same category of Oil which is “ Light and Sweet Crude Oil”.

International Oil Pricing vs. US Oil Pricing

International Oil Pricing : Brent Crude Oil Price represents more so international oil pricing market (Europe, Africa, Middle East),

US Domestic Oil Pricing : and WTI Crude Oil more so represents the United States domestic oil pricing market.

Brent Crude Oil & WTI Crude Oil Price Break

Up until around 2011, the Price of Brent Crude Oil and WTI Crude Oil were around nearly the same level, where Brent Crude was just slightly lower in price. But as More Supply of United States Oil came into the market from Shale Fracking, in 2011, WTI Crude Oil Price became significantly and consistently lower than the Brent Crude Price ( Look at Figure 11 ) . Since then, this Price relation has continued to hold.

Figure 11 - Brent Crude Oil Vs WTI Crude Oil ( Blue = Brent Crude , Green = WTI Crude )

( Data : Yahoo Finance , Futures , Date : 3/18/2024)

US Exports Benefit from Increasing Oil Price Spread (Brent Crude Oil - WTI Crude Oil )

The price spread between Brent Crude Oil and WTI Crude Oil can be an indicative metric to monitor regarding US Exports of Crude Oil. The Larger the gap in Price from Brent Crude Oil and WTI Crude Oil, the more selling of Exports for US Crude Oil and Natural Gas. The Higher the gap in price of the spread, would mean Brent Crude Oil has gained more in price than usual, and is becoming increasingly more expensive than WTI Crude Oil Price. The Higher this gap, the more beneficial it is for US WTI Crude Oil Exports.

EU Sanctions on Russia Increase Oil Price Spread (Brent Crude Oil - WTI Crude Oil)

When there are Geopolitical events that affect regions and countries that are significant to the international oil market, the price of Brent Crude Oil Price tends to increase drastically. Since WTI Crude Oil price at this stage would be at cheaper price than usual relative Brent Crude Oil, Foreign buyers increase more of their purchasing of WTI Crude Oil and less of Brent Crude Oil. This is what has occurred in Europe during the time of the Russian invasion of Ukraine and afterwards, where periods of Larger Gaps of Price spread of Brent Crude Oil and WTI Crude Oil emerged, European countries increased imports from US Oil Producers. The cheaper price of WTI Crude Oil relative to Brent Crude Oil, incentives US Oil Producers to produce more production to meet the Global Demand, which ultimately increases Supplies of Oil and Natural Gas. Look at Figure 12.

Figure 12

( Data : Yahoo Finance , Futures , Date : 3/22/2024)

Natural Gas Market Outlook

• Warmer Winter Weather : A Mild Winter weather has increased Natural Gas Supplies, this with a combination of Europe switching from purchasing Crude Oil and Natural Gas from Russia to other countries, with the United States being the leading trading partner has increased US Production of Crude Oil and Natural Gas Supplies.

• Record US Oil Production : The international Cartel of OPEC has been continuing to make Oil Production cuts to increase the price of Oil. At the same time, the United States is now the leading Oil Producer in the world, and has made record high levels in Oil Production in 2023 for any country in world history, which has offset and compensated the production cuts that come from OPEC, which has further increased the Global Supply of Oil more than OPEC likely expected.

• Low Global Economic Growth : In contrast to the United States, the Global Economic backdrop for many parts of the world is currently slow to stagnate economic growth. In Europe, South America, Japan, China have experienced slow to stagnating economic growth. In North America, even while the United States has been experiencing strong economic growth, the bordering countries of Canada and Mexico have been experiencing slow economic growth. If this type of economic environment continues, it will be harder for prices of Crude Oil and Natural Gas to sustain upwards in slow and stagnated growth economies.

• Recent US Oil Inventories Decreasing : More recently US Crude Oil inventories have been decreasing. This is signaling an increasing domestic buyer demand for Oil in the United States. In the Summertime, Oil Demand and Prices tend to be the highest since many people travel. Oil producers will be ramping up supplies to prepare ahead for the summer season. This would further increase the already excess supplies of Natural Gas and put pressure on further decreasing the price of Natural Gas.

• Natural Gas Companies Cutting Production : Many of the Natural Gas Producing firms that increased production when Natural Gas prices were much higher cannot make a profit by selling at these low levels. In response, some of the largest Natural Gas Producing firms have stated to cut further production of Natural Gas until prices increase to a higher level. This would reduce any planned future supply and can help ease the decrease in Natural Gas prices and move it higher. But any sustainable medium term to longer term increase in Natural Gas prices would have to be aided by stronger demand factors to clear the supply.

Performance Notes : Based on Proprietary Returns
Disclaimer : Past Performance is not necessarily indicative of Future Results
Disclosure : The risk of loss in trading futures and options can be substantial. You should therefore carefully consider whether such trading is suitable for you in the light of your financial condition. In order to invest in Paraimbal LP fund you must be a qualified client. Offers to invest in the fund are made by prospectus only. Before participating in the program, prospective clients are required to review the Disclosure Document prior to or along with the Management Agreement. Paraimbal, LLC is a registered CPO & CTA ( Commodity Pool Operator and Commodity Trading Advisor ) with the CFTC (Commodity Futures Trading Commission) and NFA Member.

Back to Blog

Decreasing Inflation Rate, but Increasing Money Supply ?

10/31/2023

By Asseged Major

How Central Bankers Reduce Inflation

Central Bankers Combat inflation by causing Money Supply to be reduced. As the economics saying goes, inflation is “too much money, chasing too few goods.” Central Bankers will reduce the supply of money available, so it causes less money available in the economy to purchase goods, in response accumulated inventory builds up of unsold goods for producers, producers will respond by reducing the prices of those goods so they can get rid of them and sell them. There are lag effects of Central Banks interest rate policy on the Economy, and not a perfect relationship with the Money Supply. But essentially higher interest rates overall will reduce the Money Supply in the Economy.

Inflation & Money Supply

In figure (1) Chart below, all of the countries except for China and Japan and just recently Brazil, have been conducting restrictive monetary policy and raising interest rates. As you can see in the chart comparing “Peak Inflation in 2022” Column with “Current - Nominal Inflation 2023” Column, All the countries listed have reduced inflation from the Peak Inflation Levels in 2022, and most by a very significant amount.

Figure 1 ( Money Supply Growth vs Inflation Rate )
(Note : Yellow Highlight are Countries with Higher Money Supply Growth with Decreased Inflation Rate)

(Data : ceic.com, tradingeconomics.com, theglobaleconomy.com)

Looking at “Money Supply Growth” column in Figure 1 Above, only 5 Countries/territories out of 14 Total Countries/territories have reduced their “Money Supply Growth” currently from 1 Year Ago. The 5 Countries and territory that have reduced their “Money Supply Growth” are USA (-3.70 %), Euro Zone (-2.10 %), Germany (-1.90 %), UK (-3.10 %), Switzerland (-10.35 %). The rest of the countries/territories have experienced an actual increase in Money Supply, even though nearly all those Countries Central Banks have been raising interest rates for over a Year. ( In Figure 1 Yellow Highlight indicates Countries with Increased Money Supply (YoY), and Decreased Inflation (YoY). )

Higher Interest Rates, but still Higher Money Supply ?

So why has Money Supply actually increased in those countries, while the Central Banks in those countries have been raising interest rates, which causes the Money Supply to decrease ? It is mainly due to the Private Sector increase in Loan amounts in the economy. The Central Bank with higher interest rates can affect the Loans Market, but they can’t directly stop Banks and Finance Companies from giving Loans. If Banks and Finance Companies continue to increase the Loan amounts, it will increase the Money Supply in the system. When a Loan is given by a Commercial Bank or Finance Lender, it will eventually be deposited in the banking system, which leads to an increase in excess reserve for a bank, in which that bank can create another loan, which this cycle continually repeats, which causes a Money Multiplier effect, where the actual Money Supply increases in the Financial System. The relation can be shown by observing the money supply growth and private sector loans amounts in the economy.

For example, Australia had an increase in 1 year change of Money Supply Growth of 3.86 % as of July 2023. Looking at Figure 2, shows the Private Sector Total Loans Amount in Monthly Periods for Australia, in Australian Dollars. Australia Private Sector Loan Amounts monthly have grown Increasingly in this same time period, as its Money Supply Growth.

Figure 2 : Australia Private Sector Loans in Billions (AUD)

Opposite Case – US Economy

The opposite case is for the US Economy. The US Economy had a decrease in 1 year change of Money Supply Growth of -3.70 % in July 2023. Looking at Figure 3, it shows the Private Sector Total Loans Amount has been decreasing in the US Economy during the same time. As is what would be expected from Higher Interest Rates from a Central Bank, and a decreasing Money Supply.

Figure 3 : USA Private Sector Loans in Billions (USD)

If Money Supply is Increasing in these Countries, than how is Inflation Decreasing ?

The next question is if Money Supply is increasing in these Economies, how come inflation is decreasing ? Economic theory suggests it is likely due to the decrease in the Velocity of Money in those economies. The Velocity of Money is the turnover rate of a currency in the economy. In other words, how many times the currency is being transacted for purchases/sales in the economy. It is a measure of consumers and businesses willingness to spend money in the economy. The higher the velocity of money, the more likely the Economy will increase in GDP Growth, the lower the velocity of money, the more likely the Economy will decrease in GDP Growth. This relationship is explained in the Equation of Exchange,

In the Equation of Exchange, MV = PY
M = Money Supply
V = Velocity of Money
P = Prices
Y = Real Output (Real GDP)

For the scenario where in an Economy there is an increase in Money Supply, and still experience a decrease in inflation (Prices) like most of the countries that was shown on in Figure 1, this would mean in the Equation of Exchange, (M) Money Supply value would increase, and (P) Prices value would decrease, for the Equation of Exchange to hold true, this would mean (V) Velocity of Money would have to decrease. For simplicity’s sake of using basic numbers, look at the following,

Example of an Economy, when the Money Supply Increases, and Inflation (Prices) Decreases, using the “ Equation of Exchange ”

Equation of Exchange
MV = PY

Initial Economy - Time Period 1
MV = PY
6(2) = 3(4)

In Time Period 2 , the Economy Money Supply (M) has increased to 8, and the Prices (P) has decreased to 2, and Real GDP ( Y ) has increased to 4. In order for the Equation of Exchange to hold true, meaning for both sides of the Equation to equal each other (MV=PY), than Velocity of Money (V) must decrease in value mathematically. Look below,

Economy in Time Period 2
MV = PY
8V = 2(5)
8V = 10
V= 1.25 ,
the Velocity of Money (V) is lower here in Time Period 2 than Time Period 1 (1.25 < 2 )

MV = PY
8(1.25) = 2(5)
10 = 10 ,
Hence, Both Sides Equal each other (MV=PY), the Equation of Exchange Holds True.

Thus in order for Money Supply to Increase to 8, and Inflation to Decrease, where Prices to Decreased to 2, the Velocity of Money had to Decrease to 1.25, in order for the Equation of Exchange to hold True. In this scenario regardless how much Prices (P) decrease, Velocity of Money (V) would always decrease. In Sum, this mathematical expression shows Inflation Decreased, even while Money Supply Increased, and it is due to the Decrease in the Velocity of Money.

The Velocity of Money would decrease regardless if the Real GDP (Y) increased or decreased. The only caveat is if the Real GDP (Y) level equaled or exceeded the Money Supply level, in that case the Velocity of Money would stay constant or actually increase. For instance, in this example, if Real GDP (Y) equaled 8 or Higher, then Velocity of Money would be constant or increase, look at following,

MV = PY
8V = 2(9) *Note : Here Real GDP (Y) = 9, the Real GDP (Y) > (M) Money Supply
8V = 18
V= 2.25 ,
The Velocity of Money Increased higher in Time Period 2 ( 2.25 > 2 ), because Real GDP (Y) is higher than Money Supply (M), (8 < 9) .

If Theory followed into practice, as long as the Real GDP (Y) does not equal or exceed the Money Supply level, than this would explain for Most of the Countries in Figure 1, where they experienced a Increase in Money Supply, But still a Decrease in Inflation, which is likely due to a Decrease in Velocity of Money. Also most of the countries that experienced this had a Positive Real GDP (Y), which fits this example scenario.

Example (Canada Economy) : Inflation Decreasing, Velocity of Money Decreasing

An Example is Canada, where its Real GDP Level is below the Money Supply Level, and it has experienced a Increase in its Money Supply Growth and a Decreasing Inflation Rate (YoY). As of of July 2023 Canada Real GDP is 2.2 Trillion Canadian Dollars, this is lower than the Money Supply in Canada at 2.4 Trillion Canadian Dollars. In other words the Money Supply Value exceeds the Real GDP Value currently in Canada. Look below at Figure 4.

Figure 4 : ( Canada Real GDP vs. Money Supply)

(Data : tradingeconomics.com)

Canada Money Supply Value is Greater than its Real GDP Value

2.2 Trillion < 2.4 Trillion

Real GDP < Money Supply

Y < M

At the Same Time as of July 2023 Year to Year Money Supply Growth increased 2.60 %, and its Inflation Rate is at 3.3 %, which has decreased from its recent Peak Inflation Rate of 8.1 %, and at the same time in which Velocity of Money has been decreasing, Look at Figure 5.

Figure 5 : Canada - Velocity of Money

(Data : moody's analytics, theglobaleconomy.com)

Example (US Economy) : Inflation Decreasing, Velocity of Money Increasing

In Contrast to Canada, in the US Economy, the US Real GDP Value is higher than the Money Supply Value. As of September 2023, the US Real GDP Value is $ 22.4 Trillion, and the Money Supply is $ 20.7 Trillion, Look at Figure 6.

Figure 6 : ( USA Real GDP Value vs. Money Supply)

(Data : tradingeconomics.com)

USA Real GDP Value is Greater than its Money Supply Value

22.4 Trillion > 20.7 Trillion

Real GDP > Money Supply

Y > M

Unlike Canada and including the 10 other countries, the US Economy Money Supply Growth has decreased, and the actual Velocity of Money is increasing. Looking at Figure 7, since the 3rd Quarter of 2021, the Velocity of Money has been increasing for the US Economy. The Velocity of Money has increased from below (1.16) to currently (1.32). The Increase in Velocity of Money has led to an increase in spending in consumption, which increases Real Output (Y) in the US Economy, as Real GDP Growth continues to grow in 2023. As of September 2023, US Money Supply Growth decreased (-3.61 %), and Inflation Rate of 3.7 %, which is a decrease from its recent peak of 9.1 % . The US Economy has experienced a decrease in Money Supply and Prices, while an increase in Velocity of Money, and Real GDP Growth.

Figure 7 : US Economy - Velocity of Money

(Data : Federal Reserve Bank of St. Louis, fred.stlouisfed.org)

Back to Blog

Why so far Global Stock Markets are Up ?

10/1/2023

By Asseged Major

Global Stock Market Performances

Globally Stock Market Performance has increased so far. On a Year-to-Year basis, major stock indices, of the US Stock Market (S&P 500) is up 19.59 %, the Japanese Stock Market (Nikkei 225) gain of 22.84 %, Germany Stock Market (DAX) gain of 27.01 % , France Stock Market (CAC 40) gain of 23.95 %. (Look at Figure A)

Global Stock Markets
(Performance Returns)

(Data : investing.com, 9/29/2023) Figure A

US Economy Beating Expectations

The US Economy has been over performing and doing better than market forecasts so far. The US Economy has experienced a Moderate growth environment with decreasing inflation. The US Economy has been Beating Market forecasts for each of the first 2 quarters. Economists and Forecasters were forecasting a flat to slight negative growth in the first 2 quarters. A sizable number of Economists and Forecasters were predicting a recession in 2023, that has become highly unlikely now. From the start of the year, the “ Wall Street Journal Economic Survey ” , median forecasts from Economists for the 1st Quarter and 2nd Quarter of 2023, were (+ 0.10 %) GDP Growth and (- 0.37 %) GDP Growth. The “Federal Reserve Survey of Professional Forecasters” median forecasts were (+ 0.2 %) GDP Growth for both quarters. The US Economy came in Beating Market Forecast by huge amounts at a full gain of (+ 2.2 %) in the 1st Quarter, and (+ 2.1 %) in the 2nd Quarter. At the same time, the US Economy has been reducing Inflation significantly, from the Nominal Inflation Rate 9.1 % (June 2022), to now 3.7 % ( August 2023), (Look at figures 1–2) .

The US Economy has been experiencing the ideal scenario from a Central Bank perspective like the Federal Reserve, while Raising Interest Rates, experiencing a reduction of the Inflation Rate with Moderate Economic Growth. The scenario of the so called “ Soft Landing ”, achieving the price stability to reduce the Federal Reserve target of the 2 % Inflation Rate level without a recession and significant job loss. There are definitely some mixed signs in the economy that also give a different picture, where some sectors in the economy may be experiencing recession effects and are contracting while other sectors are not. This is termed what economists call a “rolling recession.” Sectors such as Freight and Manufacturing are experiencing similar effects. The August 2023 Jobs Report added 187,000 Jobs, but sectors in Transportation and Warehousing lost (-34,000 jobs), the August 2023 ISM Manufacturing PMI Index value of 47.6 still remains below the Contraction threshold value for 10 consecutive months. Overall, the stock market has continued to increase in 2023 and for good reasons by investors as Economic data has come in with solid economic growth and beating expectations (Look at Figure 3 above). It is likely that the 3rd quarter economic growth will be the same or better than the first 2 quarters.
(Data : “wall street journal economic survey”, “federal reserve bank of philadelphia-survey of professional forecasters”, US Bureau of Labor Statistics, Institute of Supply Management)

Europe Stock Markets

European Stock Markets have reached record highs, while countries in the region have been experiencing slow to flat growth. Currently the Stock Price levels are below their record highs by not far off. The French Stock Market, UK Stock Market, and German Stock Market all reached record highs in 2023 so far. (Look at Figures 4-7)

Euro Zone Consumer Confidence

Euro Zone Consumer Confidence Survey had decreased for 2 months in a row. It made consecutive gains month after month, than starting a decline in August. For the month of September, it came in at (-17.8) (Look at Figure 8). Important to note that the Euro Zone Consumer Confidence Survey value is a negative value. Historically majority of the time the values in the Euro Consumer Confidence survey are in negative territory. This is the lowest value in 6 Months. It is below its long-term average. The decline in value represents a pessimistic sentiment that consumers in the Euro Zone have about the economy and is translated in there the decline in GDP Growth through consumption.
(Data: tradingeconomics.com|European Commission, theglobaleconomy.com|EuroStat)

Germany Stock Market

In the case of Germany, in the first 2 quarters it has reached negative economic growth for both quarters and falling below market forecasts and yet the German Dax Stock Market is up positive with a 27.01 % Return (YoY), and 10.51 % Return (YTD). ( Look at Figures 9-10)

Global Stock Market Patterns

• Globally Stock Markets have performed as would be typically is the case in a normal economic environment (exception of China), where the US and major Foreign Stock Markets are up, and the US Dollar is down. Europe and Japan Stock Markets are up positive in gain, and Foreign Currencies are up in positive gain against the US Dollar, year to year basis, the US Dollar index is down -5.42 %, the Euro and Pound is up 7.89 % and 9.33 % against the US Dollar.

• The Euro Zone is currently in a slow to negative economic growth, China is currently by their historical standards are in a Slowing Economic environment, and experiencing disinflation , and mixed in with the headwinds from their Commercial Real Estate Property crisis. Japan Stock Markets have continued there gains due to interest rate differential's of easing monetary policy.

• The recent current retracement of US Stock Markets, which may have spread as losses into other Foreign Stock Markets, is the current fear from investors is the uncertainty of how long interest rates will remain high or continue to be raised by the Federal Reserve. This is more currently driven at the moment by market sentiment and emotion and can be advantageous for an investor on either side of the market.

• Overall, so far up to now it seems like the positive sentiment here in US Markets may have spread into the performance in major Foreign Markets. Given their economic environment, there is much less of a case for the Europe Stock Markets to proceed in this trend, than it is in the US and Japan Stock Markets.

(Data : investing.com, 9/29/2023)

Back to Blog

Why the Core Inflation Rate is Higher than Nominal Inflation Rate ?

9/28/2023

(ParaImbal Research)

By Asseged Major

Historically Nominal Inflation most of the time is higher than Core Inflation. The reason being is because Nominal Inflation takes into account volatile items such as Energy and Food, while Core Inflation strips out those items. Currently Core Inflation in a number of countries is higher than Nominal Inflation ( USA, China, Germany, New Zealand, Brazil, Mexico ) ( Look at Figure 1, Highlighted in Yellow)

Nominal Inflation vs. Core Inflation (YoY)
(Figure 1)

(Data : tradingeconomics.com)

Reasons For Core Inflation higher than Nominal Inflation

(Oil & Commodities Drop in Prices )

A main reason for this is that the price of Oil (Energy) and other Commodities are at lower price levels than last year, Example Crude Oil reached a peak of $ 120 range and Copper reached near $ 5 level in 2022. Although recently Price of Oil has increased to $ 90 price ( Figure 2 : Chart of Crude Oil, Figure 3: Chart of Copper ).

WTI Crude Oil Price (Figure 2)

(Data : Yahoo Finance, Date : 9/26/2023)

(Figure 3) Copper Price

Data: Yahoo Finance, Date: 9/26/2023)

(China Largest Global Share of Commodities)

China is the biggest purchaser and importer of Commodities. As you can see in the chart below, China for a number of Commodities has a significant or 50 % or higher in global share .China for example consumes 50 % of Copper from the global share, and imports 60 % of the global share that is traded in Copper. China consumes 60 % of iron ore, and imports 70 % of the global share that is traded in iron ore, and consumes 50 % of Coal, and imports 60 % of the global share that is traded in Soybeans. ( Figure 4 – China Global Share Commodities)

(Figure 4) China Global Share of Commodities

(China Weakening Economic Growth )

In the first 2 quarters 2023, China has experienced disinflation with substantially lower economic growth than originally expected from the China Reopening. This has been a leading effect on decreasing Commodities Prices, and not meeting market expectations ( Figure 5 – China GDP Growth, Figure 6 ) .

(Figure 5) China GDP Growth Rate (Qtr to Qtr)

(Data : tradingeconomics.com; National Bureau of Statistics of China)

(Figure 6) China Nominal Inflation Rate (YoY)

(Euro Area Weakening Economic Growth )

At the same time, the Euro Zone has been experiencing slow to flat and some cases negative economic growth.

(Figure 7) Euro Zone GDP Growth Rate (Qtr to Qtr)

(Figure 8) Euro Zone GDP Growth Rate (Annual)

Potential Drivers of Inflation or Disinflation ( China & Euro Zone Slowing Economic Growth + OPEC Supply Production Cuts )

•While both China and the Euro Zone area have been experiencing lower pace of economic growth, Globally the Core Inflation Rate in a number of countries has been continuing near or higher than the Nominal Rate. The Core Inflation Rate seems stickier than the Nominal Inflation Rate. A scenario where there is a rebound in Economic Growth in Euro Zone and China may cause further pressure in prices elevating inflation as consumption in Commodities and Goods/Services increase in demand.

•OPEC has been continuing their current policy of reducing Oil Output, to reduce the Global Supply of Oil, further adding to the Price Pressure that assists in increasing Inflation.

•Thus, if these factors continue to head in this direction, the Nominal Inflation Rate may increase further in the medium term, thus making prices more sticky in the medium term.

•To the contrary, if Oil Prices continues to increase from the effects of OPEC Supply Cuts in an environment of low / stagnant economic growth like Euro Zone and China, this effect may further cause decrease in inflation causing disinflation and to potentially deflation.

Disclaimer :
ParaImbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of ParaImbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate a futures trading program, or securities.

Author

Archives

Categories

subscribe to receive research

A Setup for a Bigger SOFR Rate Crises ( US Repo Market )

​​Overnight Loan Market (Fed Funds Rate & SOFR Rate )

SOFR Rate Crises 2019 (US Repo Crises)

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)(Figure 1)

SOFR Rate High Peak on Sept 17, 2019( Intra-Day ) (Figure 2)

​What was the Cause of the SOFR Rate Crises in 2019 ( US Repo Crises ) ?

Figure 3 - Total Bank Reserves in Banking System​ (Leading to SOFR Rate Repo - 2019 Crises )

(Figure 4 ) US Primary Dealer - US Treasuries Net Position ​ ( 2015 - 2019 )

Current Similar Signs of SOFR Rate Crises in 2025 ​and Beyond ( US Repo Crises )

Fed Funds Rate & SOFR Rates (Median Rate for Transactions) (Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)​ (Figure 5)

Fed Funds Rate & SOFR Rates (Median Rate for Transactions) (Red Color = Fed Funds Rate, Yellow Color = SOFR Rate) (Figure 6)

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)( Figure 7 )

Total Bank Reserves in US Banking System( Figure 8 )

( Figure 9 ) US Primary Dealer - US Treasuries Net Position ( 2022 - 2025 )

Risk Factors in SOFR Rate Crises appearing in 2025 and Beyond

US 10 Year Treasury Bond Yield ( Figure 10 ) ​

Fed Funds Rate does Not need to be Lowered (it's a Market Charade)

US Economy Continuing Solid Positive Growth

Inflation Rate

Services Inflation Remains High

Rent Inflation remains High

Corporate Borrowing continues to Increase

Money Supply in the US Economy is Increasing

What does this Really Mean for the Feds Fund Rate, Interest Rates and for the Economy ?

Natural Gas and its Rare Price Levels

Natural Gas Prices - Low Prices

What is Causing Natural Gas Prices to Decrease ?

Mild Winter Weather

US is biggest Producer and Consumer of Natural Gas in the World

Warm Winter Increasing Natural Gas Inventories

US Record Oil Production in 2023

US is Largest Oil Producing Country in the World

Fracking Increased US Oil Production

US Record Natural Gas Production in 2023

Europe Dependency on Russia Energy Imports

Europe Sanctions on Russian Crude Oil and Natural Gas

Europe Oil Trading Partners, Before vs After ( Russian invasion of Ukraine )

Europe Natural Gas Trading Partners, Before vs After ( Russian invasion of Ukraine )

Increased US Exports of Oil and Gas to Europe

Spread : Brent Crude Oil Price - WTI Crude Oil Price

International Oil Pricing vs. US Oil Pricing

Brent Crude Oil & WTI Crude Oil Price Break

US Exports Benefit from Increasing Oil Price Spread (Brent Crude Oil - WTI Crude Oil )

EU Sanctions on Russia Increase Oil Price Spread (Brent Crude Oil - WTI Crude Oil)

Natural Gas Market Outlook

Decreasing Inflation Rate, but Increasing Money Supply ?

How Central Bankers Reduce Inflation

Inflation & Money Supply

Figure 1 ( Money Supply Growth vs Inflation Rate )(Note : Yellow Highlight are Countries with Higher Money Supply Growth with Decreased Inflation Rate)

Higher Interest Rates, but still Higher Money Supply ?

Figure 2 : Australia Private Sector Loans in Billions (AUD)

Opposite Case – US Economy

Figure 3 : ​USA Private Sector Loans in Billions (USD)

If Money Supply is Increasing in these Countries, than how is Inflation Decreasing ?

​Example (Canada Economy) : Inflation Decreasing, Velocity of Money Decreasing

Figure 4 : ( Canada Real GDP vs. Money Supply)

Figure 5 : Canada - Velocity of Money

Example (US Economy) : Inflation Decreasing, Velocity of Money Increasing ​

Figure 6 : ( USA Real GDP Value vs. Money Supply)

Figure 7 : ​US Economy - Velocity of Money

Why so far Global Stock Markets are Up ?

Global Stock Market Performances

Global Stock Markets(Performance Returns)

US Economy Beating Expectations

​Europe Stock Markets

Euro Zone Consumer Confidence

Germany Stock Market

Global Stock Market Patterns

Why the Core Inflation Rate is Higher than Nominal Inflation Rate ?

Nominal Inflation vs. Core Inflation (YoY)​(Figure 1)

​Reasons For Core Inflation higher than Nominal Inflation

(Oil & Commodities Drop in Prices )

WTI Crude Oil Price (Figure 2)

(Figure 3) Copper Price

(China Largest Global Share of Commodities)

(Figure 4) China Global Share of Commodities

Overnight Loan Market (Fed Funds Rate & SOFR Rate )

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 1)

SOFR Rate High Peak on Sept 17, 2019( Intra-Day )
(Figure 2)

What was the Cause of the SOFR Rate Crises in 2019 ( US Repo Crises ) ?

Figure 3 - Total Bank Reserves in Banking System
(Leading to SOFR Rate Repo - 2019 Crises )

(Figure 4 ) US Primary Dealer - US Treasuries Net Position
( 2015 - 2019 )

Current Similar Signs of SOFR Rate Crises in 2025
and Beyond ( US Repo Crises )

Fed Funds Rate & SOFR Rates (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 5)

Fed Funds Rate & SOFR Rates (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
(Figure 6)

Fed Funds Rate & SOFR Rate (Median Rate for Transactions)
(Red Color = Fed Funds Rate, Yellow Color = SOFR Rate)
( Figure 7 )

Total Bank Reserves in US Banking System
( Figure 8 )

( Figure 9 ) US Primary Dealer - US Treasuries Net Position
( 2022 - 2025 )

US 10 Year Treasury Bond Yield ( Figure 10 )

Figure 1 ( Money Supply Growth vs Inflation Rate )
(Note : Yellow Highlight are Countries with Higher Money Supply Growth with Decreased Inflation Rate)

Figure 3 : USA Private Sector Loans in Billions (USD)

Example (Canada Economy) : Inflation Decreasing, Velocity of Money Decreasing

Example (US Economy) : Inflation Decreasing, Velocity of Money Increasing

Figure 7 : US Economy - Velocity of Money

Global Stock Markets
(Performance Returns)

Europe Stock Markets

Nominal Inflation vs. Core Inflation (YoY)
(Figure 1)

Reasons For Core Inflation higher than Nominal Inflation