Credit and Money Supply Indicators:

The injection of capital and elimination of caps on swap lines between foreign central banks and the Fed have engineered modest improvement in credit indictors over the past week.

In addition, to our close observation of Libor fixings and the LIBOR-OIS spread, we also pay close attention to the TED spread as an indicator of financial health. The TED spread has narrowed by 169 points, but the elevated reading of the VIX indicates continued fears in market. However, the improvement in the TED spread is an indication of the market slowly beginning to function.

Unfortunately, the improvement has not been paralleled by the LIBOR-OIS spread. This spread has only compressed by 60 basis points and is another indicator of continued stress in credit markets.

Commercial Paper

There is a modest signal that lending has restarted on the back of the Fed program to purchase commercial paper. Through the end of the week, the major target appears to have been the commercial community, as the non-financial community continues to suffer.

Bank Assets

Commercial banks see an increase in assets and a modest restart to lending with consumer still drawing on home equity.

Fear still pervades among financials. Banks are holding excess reserves which is an indicaton that banks are horading cash in the aftermath of the Treasury’s annoucement one week ago.

Monetary Aggregates

MZM declines while adjusted monetary base skyrockets. With velocity of money declining and Fed mopping up excess liquidity in the market, risk of inflation has substantially moderated in the near term. However, given the sharp increase in the adjusted base the market should closely observe continuing Fed action to sterilize those increases.