What markets are focused on, part II

Following my recent post about the most referenced topic in FX commentary, I received a number of questions from readers about whether topic X was being talked about more or less.

So I visualized the data differently for all those interested – this time as time series. Each chart show the number of references made to a particular topic on a monthly basis.

NLP panel

References to the trade war, Fed and Trump increased in May. Meanwhile references to Covid-19 have been consistently sliding lower every month since March.

See last post for methodology. Everything done on Python.

Abbas Keshvani

What markets are focused on

The financial sector produces a lot of commentary on the things affecting markets. A lot of this year’s commentary has been focused on Covid-19, but before that there was a lot of literature being produced on the US-China trade war and Brexit.

Here I chart, for every month, the most talked about issue in financial literature. I did this by pulling out hundreds of daily FX commentary pieces for the last two years and analyzing the most used words (excluding the generic ones like “the” and “markets” and “economy”).

What markets are focused on

Naturally the total number of references to Covid-19 for a given month is not just the number of times “Covid-19” is printed, but also “coronavirus” and “virus”. A similar methodology is adopted for the US-China trade war.

While Covid-19 remained in the top 5 of topics for May, we can see the focus is starting to balance out, with the the Fed getting the most number of references as we approach the June meeting (which will have the Fed’s quarterly economic projections (which they skipped in March). There was also a pick-up in references to “Trump” and “trade” this month, suggesting that we aren’t quite done with the US-China theme.

Data mining, text-analysis and chart all done on Python.

Abbas Keshvani

The Fed’s balance sheet

The Federal Reserve (or “Fed”) is the central bank of the United States, in charge of setting interest rates, regulating banks, maintaining the stability of the financial system, and providing financial services such as swap lines (which temporarily provide foreign central banks with dollars).

The Fed has its own balance sheet, which means its owns assets such as US government bonds (“Treasuries”) and has liabilities such as reserves (cash which financial institutions keep with the Fed) and currency (which technically counts as a liability because the Fed “owes” you things for the dollars you hold – historically it was gold, but now it is other assets such as bonds).

Fed BS

  • In the aftermath of the Great Recession from 2008, the Fed undertook Quantitative Easing (QE), which means it created new money to buy bonds and loans. This increased its balance sheet from roughly $1 trillion in 2008 to $4.5 trillion in 2014.
  • From 2014 to 2018, the Fed stopped buying additional bonds and loans under QE, and its balance sheet stabilized.
  • From 2018 to 2019, the Fed started to sell some of its assets, but this only reduced the balance sheet to around $3.8 trillion.
  • Around the Covid-19 outbreak, the Fed started buying assets again and also temporarily provided dollars to other central banks. This has ballooned the Fed’s balance sheet to around $6.6 trillion today.

Graph produced on Python, data from Federal Reserve.

Abbas Keshvani