First, I want to reinforce the point that there are no accidents. So I’ll rehash the summary of this monthly tax revenue report as a reminder of the progression of how we got here.
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The information we have on supply is known, either in advance or at least in real time. We merely need to monitor the tax revenue trend, and legislation that affects the Federal Budget and therefore, Treasury supply. We track Treasury supply because Fed policy comprises only one side of the supply/demand equation. Treasury supply makes up the bulk of the other side. Non-subscribers, click here for access.
8/2/22 Federal tax collections were solid in July. The recession that mainstream economists have been predicting, may be coming. I don’t know. But it’s not here yet. Withholding tax collections are still going gangbusters despite a bit of slowing in July. Non-subscribers, click here for access.
That slowing isn’t out of the ordinary. Collections fluctuate month to month. They’re still solidly positive on balance. Non-subscribers, click here for access.
Government finances also benefitted from a sharp drop in spending. The usual July deficit became a surplus. Non-subscribers, click here for access.
Treasury supply was therefore light. In fact, nonexistent for the first 3 weeks of the month. There were $12 billion in net paydowns from July 1 to July 21. The markets were flooded with cash. Non-subscribers, click here for access.
The bond market had a stupendous rally. I had expected bonds to rally based on the light supply, but this was ridiculous. As usual, Wall Street overdid it. Now the time has come to pay the piper. [Reminder- this was posted on August 3.] Non-subscribers, click here for access.
While revenue growth shows no sign of going negative, Congress just passed a spending package that will increase spending. The deficit will begin to grow again. That translates to more Treasury supply. At the same time, investors and dealers will have less cash to absorb it. That will translate to lower prices and higher yields. Non-subscribers, click here for access.
We already saw the effects of the Treasury running out of excess cash in the last couple of weeks. T-bill paydowns ended as I had projected they would in July. New T-bill issuance is suddenly mushrooming. This will pull cash out of dealer and investor accounts and into the US Treasury, which will instantly spend it to pay its bills and obligations. Non-subscribers, click here for access.
That spending increase might even keep the US economy perking along at a solid growth rate, surprising Street economists and portfolio managers. But the cash to support that growth will come from investor accounts and dealer accounts. More money for economic spending, less money for stock and bond purchases. Non-subscribers, click here for access.
The bond rally should reverse, perhaps violently. The stock rally should also end. If there’s something that would sustain these rallies, I haven’t thought of it. [Again, all posted August 3] Non-subscribers, click here for access.
The end of month data for August looked better than it was… Here’s why, and what it means for the markets, looking ahead. Non-subscribers, click here for access.
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