EM LATAM CREDIT: LATAM Credit Market Wrap

Source: Bloomberg Finance L.P./MNI  

Bloomberg reported a US crude inventory build of 7.4mn barrels last week but a drawdown at Cushing of 978k, according to people familiar with the API data. Gasoline stocks rose 3.0mn while distillate fell 4.8mn. The official EIA figures are out on Thursday. Last week they showed two consecutive weekly stock builds. Given the market is expected to shift into surplus soon, inventory data are being watched closely.

Chair Powell's speech Tuesday, titled "Understanding the Fed's Balance Sheet", included a passage that saw some expectations brought forward for the timing of the end of Fed balance sheet runoff: "Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision." 

• Analyst expectations for QT to end are roughly focused on end-year timing, with at least one analyst eyeing an end as soon as November with some still seeing early 2026 (February/ Q1). Note that the NY Fed's latest Survey of Market expectations showed the median respondent expects Fed balance sheet runoff to end in January.
• TD: "Given the Chair's focus, we believe the end of QT is likely to be announced at the October FOMC meeting (compared with our prior call for early-2026). This will
  ensure that the Fed will no longer allow Treasury runoff starting in November...while we expect the SOMA portfolio to remain steady, substantial year-end pressure
  could lead the Fed to consider resuming open market purchases of securities as early as 2026."
• BofA: "Powell comments affirm our Fed B/S base case: (1) QT stop at end '25 & move MBS repays into UST, likely bills, at pace of $10-20b/m (2) Fed B/S growth in Mar '26 to offset liability growth (i.e currency & reserves), likely into bills, at pace of $15b/m. Both should see Fed buys in secondary market due to cash flow timing issues. This could provide ~$30b/m of bill support. Fed bill buying helpful for UST WAM shift. Risks are Fed could: (a) end QT or offset liability growth later (b) buy mix of bills & coupons. Fed B/S liability driven growth not QE b/c minimal duration risk removal / financial condition easing."
• Goldman: "We are pulling forward our forecast for the end of balance sheet runoff. We now expect the FOMC to announce at its January meeting that runoff will end in February. We see these comments as broadly consistent with our expectation that runoff will end at the end of Q1, though we think they raise the risk that runoff stops a bit earlier."
• Deutsche: "Our interpretation is December" (re Powell's mention of balance sheet runoff potentially ending in the “coming months”).
• JPMorgan: "In footnotes to [Powell's] remarks, it was observed that reserves are currently about 10% of GDP and were 8% of GDP when funding pressures emerged in 2019. We continue to think that balance sheet runoff ends in 1Q26."