The narrative of the FED for 2019 was, until the summer, that of a progressive reduction of the quantitative intervention in the face of a healthy economy and with decreasing needs for support. It did not matter that trade wars created increasing uncertainty.

It was therefore expected that the FED's balance sheet would contract down to at least 3.5 trillion dollars, to then maintain a "neutral" level allowing the central bank to preserve valuable bullets in the event of future crises.

In the same period, however, the US rate curve had inverted and seemed to pave the way for a recession over the next 18/24 months.

Unexpected growth in the balance sheet of the FED

Suddenly, after the summer, the very short-term American money market (REPO market) began to show signs of very strong tension and lack of liquidity. The reasons for this tension are uncertain to date but the immediate effect has been under everyone's eyes. The overnight rate had skyrocketed, forcing the US central bank to make an extraordinary injection of liquidity and the consequent re-expansion of the balance sheet for a total of 250 billion. The practical result of this manoeuvre was, de facto, a new Quantitative Easing, totally unplanned and somehow "forced" by the banking system.

Within a few days, American short-term rates of up to two years dropped by an average of 20 basis points, the curve reversal disappeared, the S&P rally began. At the same time, the prevailing narrative changed, and with it the market climate: the first step of an agreement between the USA and China became almost a given and for an economy, already in excellent condition the prospects were of a period of fireworks.

However, the most careful observers still have the doubt that this fantastic rally is more the result of an unnecessary QE than that of expectations of further healthy economic expansion.

The S&P 500 has recorded new highs practically every week since the beginning of October. In the last 4 days there was a new high every day: a record - second only to the 12 days of '28 - exciting or frustrating depending on which side of the risk you are on.

On the other hand, the US manufacturing figures indicate a further contraction (ISM <50) even if they seem to have reached the bottom. It will be very important to observe the next data, next December 2nd.

Displacement and "flattening" of the US curve after the extraordinary FED intervention

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