Market 12/27: Arbitrage trading could prompt Fed to end BTFP early

Fed likely to end bank rescue package BTFP in March 2024

The spread between IORB rate (interest rate on reserve balances at the central bank) and BTFP rate is wider than ever.

Prospects of Fed rate cuts next year cause overnight swap rates (OIS) to fall, dragging down BTFP rates (= 1Y OIS rate + 10bps) as well …
=> The growing interest rate differential between BTFP and IORB makes banks' interest rate arbitrage trade even more attractive.

Therefore, banks are using low-rate BTFP loans from the Fed to invest in higher-yielding channels (also from the Fed like IORB) to generate profits.
- BTFP borrowing is surging to a record high 131 billion USD - the highest figure since the rescue package began in March.

=> The more the system relies on making money from the Fed, the more it reduces banks' incentive to continue their primary role as lenders to businesses.

=> This is also a reason for the Fed to consider ending the BTFP program early!

Richmond businesses' manufacturing index drops sharply

In the last two months, Richmond businesses' manufacturing index has fallen more than expected, signaling negative production trends.

In December, the index fell from -5 to -11 (lower than expected: -7).

All component indices recorded declines:

Shipments down from -8 to -17.
New orders down from -5 to -14.
Employment situation slightly down from 0 to -1.

Meanwhile, selling prices rose slightly in December and are expected to continue rising in the coming period.

Red Sea route raises concerns for many shippers

Container freight rates have risen 26% over the past four weeks, however, ship owners are still rerouting ships to avoid attacks.

Hapag-Lloyd AG says it will avoid sending its ships through the Red Sea area, even with the US declaring protection.

Attacks or seizures of ships are spreading more widely in recent weeks.

Meanwhile, refineries in India are striving to increase supply from the Middle East region and neighboring countries due to risks of prolonged shipping times and higher costs.

Russia expects average Brent oil price to rise to 80-85 USD/barrel next year.

Despite recent tensions, Maersk and AP Moller-Maersk A/S shipping lines have started sending containers back through the Red Sea after US sponsorship.

Some other carriers are also considering nighttime movements to avoid drone attacks.

Tesla's business outlook and electric vehicle market competition

Tesla has promising projects in the near future:

Tesla prepares to launch upgraded Model Y version at Shanghai factory.

Uber partners with Tesla to launch electric taxi service in Japan

For Q4/2023, Tesla is expected to report record quarterly EV sales after letting BYD nearly catch up in the previous quarter:

Meanwhile, there is still considerable competition for Tesla: Chinese EV maker BYD is poised to overtake Tesla as the world's top EV seller by sales.

Compared to Tesla, BYD has more models at lower prices.

In the previous quarter, Tesla sold only ~3,456 more EVs than BYD: the sales gap between the two is narrowing.

Some other news:

China: November industrial profits surge unexpectedly +29.5% YoY despite prolonged deflation fears thanks to a series of economic stimulus measures.

New York Times sues Microsoft and ChatGPT for copyright infringement by using registered copyrighted data to train Machine Learning algorithms.
- NYT recommends these companies scrap chatbots using copyrighted materials.

Rice prices rise to a 15-year high of 659 USD/ton after India restricts exports and dry weather threatens production.