The Fed’s balance sheet has now grown by over $2.8 trillion since March. That’s when the pandemic panic was at its extreme and the Fed went into high gear. Lately that growth has slowed drastically, to around $51 billion per month on average since July. But that is decidedly not the whole story. Subscribers, click…
The outlook for the most of the rest of October is bullish. But it’s not an endless bull any more.
We have known for a couple of months that there would be a mountain of Treasury supply hitting the market at the end of September. We also knew that Fed QE would be far from adequate to absorb this supply. So I have expected something bearish for stocks at the end of September. This could spill over into the first week of October.
But then things get hairy for bears, with potentially happy days for bulls. Unfortunately, we have a little problem this week. There’s no visibility. We don’t know what they have planned for the next couple weeks. That’s different from usual, where we can usually see ahead for a week or two because we know the Fed’s QE schedule, and also pretty much know how much Treasury supply to expect.
Now, thanks to the exigencies of the past pandemiconomic US Treasury fund raising back in March and April, we don’t have that luxury on Treasury supply, which forces us to surmise some things.
Here they are.
Composite liquidity continues to rise, but at a slower pace than in the second quarter as the Fed has slowed QE. That reduces the cash flowing into Primary Dealer accounts, which in turn contributes to a slowing in secondary liquidity drivers.
“Slowing” is a relative word, however. Historically, the numbers remain gargantuan.
No, something else is holding the market back. Here’s what that something is, and what we’re going to do about it.
Surprise, surprise! They pumped the money in but the market didn’t rise.
The Fed has been in the process of pumping $88 billion into Primary Dealer accounts this week in the form of its regular monthly MBS purchase settlements. Most of it is done. $22.7 billion of it will settle on Monday September 21. That will be the last MBS settlement until October 14-21.
Meanwhile, the Fed continues to purchase and settle Treasuries virtually every day. Over the past week that’s amounted to a total of about $37 billion. That means that a total of $103 billion in QE settled this week. That’s how much cash the Fed pumped into Primary Dealer accounts.
It didn’t matter. The stock market sucked gas. Bonds treaded water. It sure looks as though the Fed has somehow managed to magically peg bond yields just below 0.80% on the 10 year. The Treasury issued $104 billion in new coupon paper over the past week and that didn’t depress the market? It’s a miracle.
But isn’t it strange that the amount of QE and the amount of Treasury coupon issuance was virtually the same.
But some other stuff sure as heck is, and you need to know about it.
The selloff that we expected as a result of the scheduled month end liquidity shortage happened.
Just one problem.
After years of following and reporting certain banking indicators for hints about how liquidity is impacting the system, and vice versa, that’s the question I’m now asking myself.
Well, there is an answer. And you need to know it! For your financial health, and for your sanity.
There will be a severe shortage of QE next week to match up with the end of month Treasury issuance. Bears have a shot there, but here’s why things tilt back toward the bulls after that. Subscribers, click here to download the report Not a subscriber yet? Get this report and access to all past…
The Fed’s balance sheet resumed its growth in August after a bit of a stall in July when dealers paid off Fed repos. That program has been at zero since then. Dealers don’t need to borrow from the Fed when the Fed is cashing them out every week with QE. And there’s the rub for…
The forecast has changed. It’s less bearish, but it’s still bearish. Here’s why.