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ECB To Pinch Hit During Fed Quiet Time, But Market Expects It

The Fed settled a huge chunk of its forward MBS purchase contracts last week, adding significantly to market liquidity while confronted with moderately heavy Treasury supply. It was enough to keep the stock pot simmering, while Treasuries sagged. It was also enough to boost systemic liquidity generally.

The next big Fed purchase probably won’t come until mid March, so the end of February would have been a bit more interesting for bears. However, the Fed and domestic liquidity measures may take a back seat over the next couple of weeks as the markets anticipate the next massive ECB funding operation on February 29. There likely has been, and will continue to be some front running, and there’s enough existing liquidity around to support it. If the ECB’s LTRO comes in light of the consensus number of €500 billion, then the market is likely to sell the news, but in my view, any number with that many zeros in it will ultimately be bullish in the short run.

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