US: Focus on Fed and fiscal policy – BBH

There are two main developments in the US and the first is about the Fed, where Vice Chairman Fischer announced he would step down early next month, notes the analysis team at BBH.  

Key Quotes

“His term as Vice Chair ends in the middle of next year.  He cited personal reasons for expediting his departure.  It leaves the Board of Governors very short staffed.  A team of seven is down to three (Yellen, Brainard, and Powell).  Quarles is yet to join.”  

“At the same time, some reports have suggested that Cohn will not be named to replace Yellen.  The press reports suggest Cohn's criticism of the White House handling of recent events involving white nationalism irked key decision-makers.  On the other hand, we had seen the chances slip when the White House moved away from initial plans to offer a detailed blueprint for tax reform.  Tax reform has seen as Cohn's main task.  Outside of Cohn and Yellen, former Fed Governor Warsh is seen as a third candidate.”  

“The second main development in the US relates to fiscal policy.  It appears that a deal is in the works to extend the debt ceiling and spending authorization until mid-December.  This saw an immediate adjustment to the T-bill market.  In our understanding of the dollar's decline since March, the drawing down of the Treasury's deposits, which helped end the H2 2016 dollar shortage, had an under-appreciated role.  The Treasury may replenish those funds over the next three months, allowing another round of maneuvering (drawing down cash) after mid-December.”

“However, we understand that the Treasury's cash position needs to be about the same as it is now.  That means that debt to be issued is simply to cover expenditures.  The agreement also removes a possible hurdle to the Fed's plans to allow the balance sheet to begin shrinking in Q4.”  

“The US 10-year yield rose 4.5 bp yesterday to 2.105% after falling 10.5 bp on Tuesday.  The yield is a little softer today as it struggles to sustain a rise above 2.1%.   When yields rose yesterday, the dollar recovered toward JPY109.40, but with yields back off today, the dollar is back below JPY109.  There are about $1.2 bln in options struck at JPY108.75 and JPY109 that expire today.”