Which brings us to escape clause: moments ago, the
FT published an interview with Boston Fed president Susan Collins in which she said that "The Federal Reserve “
would absolutely be prepared” to deploy its firepower to stabilise financial markets should conditions become disorderly, according to one of the central bank’s top officials" adding that the Fed
“does have tools to address concerns about market functioning or liquidity should they arise”.
Great.... but -
there is of course a but - Collins also said
“markets are continuing to function well” and that “we’re not seeing liquidity concerns overall”.
In other words, the Fed has a
liquidity put... there is just no
liquidity crisis.
Only - even if one ignores the blow up of the basis trade which as we explained previously has soaked up all the market's available liquidity -
there is a liquidity crisis according to JPMorgan.
Below we excerpt from a note published this morning by JPMorgan's Market Intel team, which quotes trader Marissa Gitler, in which she said that liquidity is now gone and that what happens next could be ugly.
While it’s important to take a fundamental stance on the macro environment, the declining liquidity picture is an important piece of the puzzle and it’s worth flagging. To put statistics around it: Top-deck bid-ask for ESM5 and TYM5 are both roughly -80% worse than the 20d market average. These are historically two of the most liquid contracts in global macro markets. The top-deck in UX1 is roughly -95% worse. There appears no recovery this morning either.
De-leveraging and deterioration of macro sentiment has morphed into a situation in which liquidity dynamics are now meaningfully impaired in liquid markets. The lack of liquidity could result in price moves that are outsized relative to the amount of flow that is actually going through. This is in BOTH directions – significant bounces can take place ‘on air’ while it could similarly lead to unruly market outcomes to the downside. This is important context as we head into risk events such as UST auctions, the FOMC Minutes, CPI, and, realistically, just every minute of the trading day now as we are subject to Tariff tape bombs.
She concludes as follows:
Equity turmoil has been fairly transparent via the selloff in indexes globally, but yesterday [April 8] the conversation rapidly flipped from equities back into the fixed income world as UST yields surged meaningfully led by the long end. It’s pretty impossible for anyone to predict where we go from here (myself included), but deterioration of the broader liquidity framework is never a great setup for risk markets.
So while the Fed may ignore warnings by entities - such as this website - that liquidity is gone, imagine a world where there is a full-blown funding crisis, banks are failing and the Fed is blamed for ignoring not just the all too clear signs, but also ignoring a warning from the largest US bank, JPMorgan.
That is not a world that Jerome Powell, no matter how much he wants to listen to Bill Dudley and crush Donald Trump, would want to be in.