April Federal tax collections data showed modest economic growth but growing Federal budget deficits. The revenue windfall from April tax collections has been counted and is in the books. Increased spending means that the government will resume debt issuance with a vengeance, at some point.
This report is a summer excerpt from Federal Budget Data Reveals Growth But Hides Ticking Time Bomb.
The key is “at some point.” The debt ceiling will force the Treasury to reduce issuance and raid internal funds to pay the bills. It can do that for a few months. Meanwhile the debt to those internal funds will pile up. Eventually, the politicians will raise the debt ceiling and the piper will be paid with massive new issuance. That mountain of new issuance will bury the financial markets.
We can’t forecast exactly when that will happen, but the TBAC (Treasury Borrowing Advisory Committee) forecast suggests that the Treasury will run out of money around the end of the third quarter or very early in Q4. So keep your ear to the ground for the political rumblings.
By waiting until the government runs out of cash, the pols will manufacture a crisis so that the ceiling gets raised. When it does, Wall Street pundits will expect a bullish resolution. We’ll expect the opposite. That’s because we know that that the market would be able to smoothly absorb that tsunami of supply.
April Federal Tax Collections Data Give The Fed No Cover
Meanwhile, recent tax trends still don’t give the Fed an excuse to loosen policy based on economic weakness. There is no economic weakness. At least not yet. Gains in withholding tax collections have been solid, at least until the past week or two when they suddenly weakened sharply. It’s too early to call that meaningful, but we’ll keep an eye on it.
Active Fed monetary tightening via balance sheet “normalization” isn’t set to end until September. Even after that, any policy that does not include active QE will effectively be tight. Without the Fed providing the money to absorb the monthly flood of Treasury supply, monetary conditions will continue to tighten. T-bill issuance will increase sharply when the debt ceiling is raised. That should put upward pressure on money rates, which may force the Fed to issue a rubber stamp increase in the Fed Funds target.
Meanwhile, I have illustrated in our Liqudity Trader reports that the rally in stocks has been funded by increased use of debt, that is, leverage. That’s dangerous and last week the indicators became so extreme that I warned of a stock market crash.
But only technical analysis can tell us where and when the inflection is under way.
That turn now seems to have begun. I cover that story in the Technical Trader.
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