The composite liquidity indicator rose last week, remaining in a strongly bullish trend. Several components were lower, including bank holdings of Treasuries and bank trading accounts, but they were more than offset by a surge in Fed SOMA, and increased net cash in the banking system. Click here to download complete report in pdf format (Professional Edition Subscribers) Free excerpt below.
Table of Contents
Macroliquidity Component Indicators
Fed Cash to Primary Dealers
Foreign central bank purchases
US commercial bank deposit flows
Bank Treasury purchases
Bank Trading Accounts
Bank reserve deposits
Treasury Auctions, Federal Revenues and Supply Impact, and Treasury Yields
Open Market Operations (OMO) and Monetary Policy Actions
Other Policy Tools and Total Fed Credit
Other Fed Balance Sheet Items – Liabilities
Bank Loans Outstanding
Foreign Central Banks
Fannie and Freddie
Money Supply and Fund Flows
Bank Holdings of Treasuries
Bank Capital Trend
The most important of the six components of the Macroliquidity Composite indicator is Fed Cash to Primary Dealers, a measure of how much cash the Fed pumps into Primary Dealer accounts each week via Open Market Operations. Following it has kept us generally on the right side of the stock market for the past 10 years.
Fed Cash to Primary Dealers
This indicator continues to rise as the Fed settles Treasury purchases daily and forward MBS purchases around mid month.
The correlations have held remarkably well since I began tracking this in 2002. It is a proprietary indicator composed of the cumulative value of operations which the Fed conducts directly with Primary Dealers. It measures the flow of cash into Primary Dealer accounts from Fed securities purchases. This indicator has the heaviest weighting in the composite. The current growth under QE3/4 is the fastest in history. It will be bullish until the Fed ends QE. Stocks will stall or pull back from time to time, occasionally hemmed in by trend resistance and buffeted by news flow, but the Fed’s cash will find its way into equities sooner or later.
The market has to get by with “just” the $11 billion a week in Fed Treasury purchases until the Fed’s MBS purchases settle at mid month each month. The July round of MBS purchase settlements took place July 15-22 and totaled $64 billion (I had erroneously calculated $79 billion before discovering the error last week). As mortgage refinancing volume declined due to rising mortgage rates, the MBS settlements have shrunk. That reduction began in July, but the total settlement amount was still substantial. Another $3-5 billion per month drop appears to be coming over the next two months. Those amounts are not material. Going forward, the rate of MBS purchases will depend on mortgage rates, which have stabilized for the time being.
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