Withholding Tax collections remained strong in January. A sharp drop in the year to year change was due to an increase in the base of comparison a year ago, and is not a sign of economic weakening. At least not yet.
Withholding collections should be at or near the trough of their usual 2-3 month cycle. So the ADP private payrolls collapse notwithstanding, and regardless of what the BLS says this morning, jobs growth is not decelerating. At least not yet.
But even if the economy is strong and the market must only absorb $80 billion per month of expected new supply versus the $$150 billion -$200 billion per month of the past couple of years, $80 billion is still more than enough to disrupt the markets if the Fed isn’t buying.
We know that the Fed was usually absorbing or funding about 85-90% of total supply, leaving the market to absorb the rest. That was enough to suppress the 10 year yield at or below 1.3%. At the time, new issuance was averaging around $200 billion per month. So the market was only absorbing $20-30 billion per month, outright. The Fed was buying or funding the rest.
When the debt ceiling was reimposed last year, supply was restricted, but the Fed maintained QE at the same pace. That meant that it was funding more than 100% of supply for a couple of months. That excess cash was sloshing around in Primary Dealer accounts. They put it to use by accumulating, marking up, and distributing stocks to a fevered customer base of institutions, hedge funds, and small traders. That caused the meltup in stock prices.
The arithmetic on Treasury supply versus market demand tells us that the average supply of $80 billion per month is more than the maximum of $30 billion per month that buyers were absorbing directly while holding bond prices stable. In other words, $30 billion in supply was what the market could bear without prices falling and yields rising. The Fed subsidized the rest.
And that’s with an expanding economy and growing tax revenues. If the economy contracts on the heels of market dislocations, that will only exacerbate the situation.
In order to absorb the Treasury supply, dealers, investors, and traders must either take on more debt, or liquidate some of their existing holdings, whether Treasuries or stocks. I suspect, based on the evidence of the past two months, that …. (subscriber version). For that reason, I’m focused on selecting swing trade chart picks on …. (subscriber version). in the Technical Trader weekly reports.
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