Withholding tax collections were relatively stable through November. But the 5 day average ticked a hair below November’s low here in early December. New lows would suggest that December’s jobs data will be awful, which will add to the likelihood of more stimulus, both fiscal and monetary. Whether that’s bullish or not depends on the Fed. The wrong fiscal/monetary balance could ignite a conflagration.
Sometimes the mouth goes faster than the brain.
I chat with Lindsay Williams on his Strictly Business Podcast, once every couple of months. When I spoke with him on Thanksgiving Day I said something that I immediately realized was wrong. I said that there’s no way to know how leveraged the Primary Dealers are in their bond portfolios.
Of course, that’s wrong.
Jay Powell’s first order of business is to keep the bond market from breaking down. When the 10 year yield hit 0.975 last week before backing off, the market was at the edge of the abyss. Leveraged dealer bond portfolios were on the brink of disaster.
The TBAC’s quarterly borrowing schedules are central to us because they tell us the schedule of expected new Treasury debt issuance (supply), months in advance.
Tax collections improved in October, but are still well below pre-pandemic levels. The US may look like it’s recovering, but it’s still in the hole it dug when Covid19 first hit. That means that Fed policy isn’t likely to change any time soon.
Last week I was surprised when the US Government’s retail sales data hit a new high. No way, I said.
Well, Way!
Yes, some retailers are seeing booming sales, particularly online, and … wait for it…
Grocery stores. Even after pulling back from the lockdown spike, they’re still up more than 7% year to year.
Now there’s a basis for a thriving, growing US economy.
Not.
Primary dealers have maintained huge and heavily leveraged long bond positions. They are only lightly hedged. Just today, the bond market is threatening to reverse the long term downtrend in yields/uptrend in prices. It’s bad news for the bond market, and for the system as a whole. And that includes stocks.
The economic rebound from the depths of the pandemic panic in April and May has ended. The economy may be rolling over again. Bad news for workers and consumers, but not necessarily for investors.
The US Government did no pandemic relief spending in August, and none is on the immediate horizon. Despite that, the monthly budget deficits are freaking enormous and frightening.
Tax receipts are weak and they will provide no relief from those deficits. The US Treasury will continue to borrow massive amounts of money in the markets.
Sounds like bad news for the stock market, right?
Eh, not quite. Here’s why.
I’ve marveled at the ability of the players to keep stock prices rising despite the reduction of Fed QE, and the continued pounding of Treasury supply on the market. Even more amazing is the fact that the rally in stocks has NOT come at the expense of the Treasury market. The Treasury market has managed not to blow up.
We may still find out just how bad things are. Because the dealers remain leveraged to the hilt. And there’s one more thing.
