EMISSIONS: UK, EU Remain Split on ETS Link, Free Permit Rules

Yesterday we noted that Eurozone excess liquidity has slipped slightly below the E2.2trln threshold in recent weeks, finally entering the ECB's wide E600bln-E2.2trln range of bank's potential reserve demand.

• We suggested that increased take-up at ECB liquidity operations will be one signal that reserve levels are reaching bank's preferred minimum. For now, the slow drift higher in ECB MRO take-up looks well-behaved, and still negligible relative to pre-2018 levels.
• The EUR GC pooling rate remains comfortably below the MRO rate for now, meaning there is still limited incentive for participants to obtain liquidity from ECB facilities.
• Still, there is some nuance under the surface.
• Commerzbank note that “in repo, short-dated rates are showing early signs of looming cheapening pressure with Italian GC increasing significantly after month-end. While it could be an outlier, likely driven by Italian banks yearning for cash, it warrants close monitoring as the pressure looks set to broaden at some point. Persistently high collateral supply and a continued reduction in excess liquidity had already put cheapening pressure on repos last year, and we expect that money market spreads could resume a boarder cheapening trend later this year. The risk is that this cheapening does not occur gradually, but with a rather unexpected spike in repos. Once cash becomes considerably scarcer, we would not rule out that repos trade back closer to the MRO”.

The Senate is expected to hold a procedural vote today to open debate on the GOP's USD$70 billion reconciliation package to fund immigration enforcement agencies through the end of President Donald Trump's term. Debate will be followed by a 'vote-a-rama' on the package, but no time has been announced yet.

• Movement on the package comes after Acting Attorney General Todd Blanche confirmed in testimony to Congress yesterday that the Department of Justice is nixing Trump’s “anti-weaponisation” fund. 
• Senate Majority Leader John Thune (R-SD) told reporters after speaking to Blanche, “I think his statements are going to be very definitive, very clear, and create the certainty [needed] for us to proceed.” Thune added it was “correct” to assume the fund is now dead.
• The reconciliation package needs 50 votes to advance through procedural votes and defeat a raft of Democratic amendments. With the fund quashed, Thune is expected to have sufficient support to push the bill through, keeping alive the possibility that the GOP could attempt a third reconciliation bill.
• With Democrats expected to regain control of at least one chamber of Congress in November, the five-month sprint to the midterms is likely to be the final chance for the GOP to pass a partisan tax and spending package. A third reconconcilliation bill has been touted as a potential vehicle for additional defence funding, including an Iran supplemental, but passing any legislation through an increasingly factured Republican conference will be execptionally difficult for Republican leaders. 

• FRBNY EFFR for prior session:
  • Daily Effective Fed Funds Rate: 3.62% (+0.00), volume: $133B
  • Daily Overnight Bank Funding Rate: 3.62% (+0.00), volume: $257B
• US TSYS: Repo Reference Rates
  • Secured Overnight Financing Rate (SOFR): 3.63% (-0.02), volume: $3.148T
  • Broad General Collateral Rate (BGCR): 3.61% (-0.02), volume: $1.295T
  • Tri-Party General Collateral Rate (TCR): 3.60% (-0.03), volume: $1.275T
  • (rate, volume levels reflect prior session)