Category: Fed, Central Bank and Banking Macro Liquidity

What happened in the stock market on September 13 (-178 on the S&P and -1276 on the Dow), was inevitable. The timing was a complete surprise, at least to me, but sooner or later, there would have been a day like this. And I’ll go out on a limb and say that there will be more of them… until the Fed reverses course.

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Federal withholding tax collections declined in August. This was the second consecutive monthly decline after rising sharply and persistently throughout June.

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Collections steadily declined throughout the month. This is consistent with the usual 3 month pulse of the US economy, where it accelerates for the first 6-7 weeks, then slows for the second part of the period. However, the current slowdown started earlier than usual and has therefore had a longer downstroke. That downstroke is due to end now. Non-subscribers, click here for access.

Despite the slowdown, revenue growth year to year remains positive, thanks to employee earnings inflation.  From the perspective of the markets, only nominal revenue matters, not the real economic growth rate. Because revenue is a key determinant of Treasury supply. Non-subscribers, click here for access.

Nominal withholding grew xx% year over year. That would be great except that it’s a big drop from the +11.3% at the end of July. Non-subscribers, click here for access.

It suggests a rapid slowing in the US economy. But it’s only slightly weaker than the xx% gain 3 months earlier, at the end of May. As JP Morgan said, markets will fluctuate. Well, guess what! So does US economic activity. Non-subscribers, click here for access.

So is the US economy decelerating or not? With wage inflation reportedly hovering around 5-5.5%, the xx% gain in withholding tax suggests that jobs growth has xxxx xxxx xxxxx. However, this should be the trough of the normal 3 month cycle, and it is no lower than the last two troughs. While the short term cyclical breather phase is a bit more extended than usual, there’s been no breakdown from the range of the past 6 months. The economy is xxxxx xxxxx xxxxxx, not xxxxxxxxxxxx. Non-subscribers, click here for access.

Of course we never know what the BLS jobs release will show. Instead of reflecting the data collection date of the 12th of the month just completed, I’ve gotten the impression in recent months that it relates more closely to where things stood at the end of the previous month. So it’s possible that the BLS imaginary number for August will reasonably strong positive growth, reflective of July tax collections, even though we know from the tax data that the jobs market began to collapse in the second half of July and continued through August. Non-subscribers, click here for access.

The monthly average has a little over two weeks of built in lag. The 5 day average of collections is whippier, but gives us a picture of weekly action in near real time. That rolling 5 day average held above the June low, but edged slightly below the February lows twice during the month. These were not material breaks. Non-subscribers, click here for access.

On the other hand, you can see in the above chart that the trend of the 11 day total collections, which is the whippiest of all, but still subject to trends, has been xxxxxxxxxxxxx xxxxxxxxx xx xxxxxxxxx xxxx xxxx xxxx  the February-June lows. Non-subscribers, click here for access.

8/3/22 If Friday’s BLS jobs report bears any semblance of reality, the number shouldn’t differ much from the growth rate in June. But given the timing of the data collection as of July 12, and the various “adjustments” that the BLS applies to their survey data, we really never know what the first release for the month will show. They then fit their data to actual data over 7 subsequent monthly revisions and annual benchmark revisions. The first release is garbage, and hit or miss as to whether it reflects reality.

The fact of the tax data shows that so far, the much feared recession isn’t here yet.

So here we are Friday morning, a few hours before the BLS jobs data release, and as usual, I can’t predict what the BLS’s fictional artistic impression of the August jobs market will look like. The fact is that it was weak and getting weaker throughout the month. But if the number is more reflective of July, that weakness won’t show up until next month. When it does show up, whether this morning or next month, the bond market and stock market will get a short lived boost from those who expect that it will mean that the Fed will soon loosen policy. Non-subscribers, click here for access.

But the fact is that if tax revenues are weakening, Treasury supply will only increase, regardless of what Wall Street says about the economy. Treasury supply will increase due to weaker tax revenue just as the Fed requires the Treasury to add $60 billion a month in new debt sales to the public to pay off the Fed. Non-subscribers, click here for access.

In addition to that extra supply from Quantitative Tightening, and a weaker economy, Fed QT also causes demand to weaken. Not only is the Fed no longer the primary buyer and financing agent in the market, but it is also choking demand by removing the cash from the banking system that would otherwise be available to fund Treasury purchases. Non-subscribers, click here for access.

The bottom line is that the weaker tax revenues are not bullish. The accompanying weaker economic data will be spun as bullish, while in fact it will not be. At least at first. It will only be bullish when xxxxxxxx xxxxxxxxx xxxxxxxx xxxxxxxx. All I can say is, “Wait for it!” I’ll give you a heads up, right here. Non-subscribers, click here for access.

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Rule Number One is “Don’t Fight the Fed.” But Wall Street and its willing herd have done just that for the past month.  Stocks have continued to rally, and bonds have held their own, both in the face of increasingly tighter macro liquidity as the Fed whispers easy while tightening the noose.

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A big reason for the rally is that the stock market became so oversold relative to the liquidity trend in May and June. That condition warned us of the potential for a sharp rally. The market had become too stretched on the downside. It was enough to drive persistent short covering, and ultimately margin buying, as Wall Street searched frantically for excuses to buy stocks. Non-subscribers, click here for access.

Sure, the rally feels surprising and frustrating, but the warnings were there, and I posted them in the last two CLI updates in May and June. Non-subscribers, click here for access.

May 23-

…stock prices have gotten ahead of the curve. They are now oversold versus the historical norms of the liquidity band over the past 13 years.

…with the oversold condition comes the likelihood of vicious vertical spike rallies along the way, as overconfident short sellers load up on their positions.

…we need to be on the lookout for the start of a spike rally. If you see it, believe it.

June 28-

The previous lows were in the context of a bubble market. This is a bear market.  That doesn’t rule out a sharp rally. In fact, I think we should expect to be surprised on the upside.

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Meanwhile, the Street and its media handmaidens grasped for straws, and they found them. They found them in the “moderating” CPI report, and in the Fed meeting minutes. From these reports, they inferred that the Fed would err on the side of ease instead of constant tightening. Naturally, they misread the data and the fact that the Fed minutes are propaganda. Non-subscribers, click here for access.

So much for the narratives. The fact is that the market can only run counter to the macro liquidity trend for so long before the short covering and animal spirits that drive margin buying are exhausted. And if Wall Street is engaging in fantasy, as I think it is, then at some point, probably soon, a moment of recognition will set in. The selling will start, and the rally will reverse. Non-subscribers, click here for access.

How do we know when? That’s a matter for the technical analysis. Non-subscribers, click here for access.

The TA that I cover in the weekly Technical Trader reports has been remarkably accurate on the broad market, but less so on the individual swing trade picks, where it’s been more miss than hit in the last month. This dichotomy between the micro and macro TA is an indication of a fractured market that is not as strong the gain in the major averages suggests. There’s a lot of scurrying around as traders look for the next hot stock or the next short squeeze. A few are hitting big, while others pull back or churn in a range. That’s enough to power the broad averages higher. Non-subscribers, click here for access.

The technical projections for the market averages have pointed to xxxxxxxxxx xxxxxxxxxx xxxxxxxxx range for several weeks. They’re xxxxxxx xxxxxx xxxxxx. Non-subscribers, click here for access.

Longer intermediate swing projections point xxxxxx, but I’m skeptical. The liquidity situation is turning more bearish as the Treasury pounds the market with new supply and the Fed holds firm on QT. The Fed is set to tighten the screws even more in a couple of weeks. It announced that they will double QT to $95 billion per month in September. Non-subscribers, click here for access.

Regardless of Wall Street’s fantasies, neither the markets nor the inflation data, nor the economic data, will keep the Fed from its appointed rounds. The strength in all three will keep the Fed on track. It is likely to stay on that track until something breaks. The Fed is never proactive. It is always reactive. It drives in the rear view mirror. The Fed will only loosen after the crisis, not pre-emptively. Non-subscribers, click here for access.

On top of the Fed tightening, the US Treasury will be in the market with even more borrowing to fund the new spending program just signed into law. That borrowing will suck cash out of the financial markets and pump it into the economic stream. It sets up conditions where stronger than expected economic data could continue to surprise the economists, the Street, and the Fed. So what would be the Fed’s excuse to stop tightening? Non-subscribers, click here for access.

Furthermore, despite all the speculation that the Fed will take its foot off the brake, sticky CPI at 8.5% will hardly allow that. The idea that the end of tightening is near is wishful thinking. Especially with another surge of government spending on the way. So keep in mind that the Fed drives in the rear view mirror. The Fed will continue to remove money from the system. And the currently strong financial markets will only encourage that. Eventually that will result in a crunch, and the market will fold. Non-subscribers, click here for access.

The time to reverse course and get short for trades is coming xxxx to a trading screen near you. The TA will tell us when. In the meantime, riding the current wave xxxxxxx xxxxxxx xxxxxx. Non-subscribers, click here for access.

That’s especially true for the bond market where yields are on the razor’s edge. Wall Street has been spreading a lot of fertilizer about the 10 year yield going to 2%. But another couple of upticks in that yield now around 2.80-2.85 will xxxxx xxxxxx xx xxxxxxxx xxxxxx, and probably a xxxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxxxx. Non-subscribers, click here for access.

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We’ve had a helluva rally in stocks and bonds. The conditions were right for this rally, and we expected it. However, it was a bit bigger than I thought it would be. There was more liquidity around then even I expected. And the Street did its job of squeezing the shorts and creating a false narrative about pending recession and the end of Fed tightening to drive the rally. It was all BS, but it worked.

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It will no longer work. Liquidity will dry up like a California forest in July. The fires will start, and without liquidity to douse them, they will burn like the fires of Dante’s hell. Non-subscribers, click here for access.

The US Treasury confirmed yesterday that there will be an enormous increase in supply in August, just as I was able to previously project based on the facts and trend data we already had. Non-subscribers, click here for access.

The stock and bond rallies are not long for this earth. It’s time to watch for, and heed, the technical sell signals. Non-subscribers, click here for access.

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As you may know, I recently moved to Nice, France, purchased an apartment, and began renovations. I’m living and working in a construction site, and personally managing the renovation. I’m having a blast, but it’s not without its challenges, particularly on leaving enough time to fulfill my obligation to you to get these reports out to you on a timely basis. I’m a little late this week, and I ask your forbearance in this process.

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This undertaking being in France means that those doing the work here will disappear for the month of August. I’ll “relax” by getting these reports out to you on a more regular schedule, at least until the second phase of my reno gets going in September. Everything should be done by the end of September. Then I won’t have any more excuses for late postings. I can’t use strolling the Promenade des Anglais, or Nice’s Old Town just two blocks from here, as an excuse (Non subscribers, click here to read this report).

If you have never been to the South of France, or even if you have, I encourage you to visit. It’s an amazing part of the world. The options for things to do around here are endless, whether it’s beaches, outdoor activities, sightseeing, or culture and food. The last two in particular. It’s France, after all (Non subscribers, click here to read this report).

Fall is gorgeous here, with daytime highs in the low to mid seventies through October, and the mid to high sixties in November. And it is sunny almost every day. If you would like to come, and have questions, drop me a note. Of course, we’ll meet for a cup of coffee, or a drink, or a meal on one of the hundreds of terrace restaurants all over this city. There are thousands of outdoor cafes and restaurants for you to enjoy all around the region, with the some of the world’s best sightseeing (Non subscribers, click here to read this report).

Now on with the show. This is the Primary Dealer update, which I last did in mid June. First, I’ll replay the summary from the last report, then update you on the details through this week. Non subscribers, click here to read this report.

The bottom line is this. Don’t be fooled by what the media is touting as a massive rally in bonds. Yes, it looks big, and it probably has a little further to go over the next couple of weeks. But in the big picture, it’s nothing. It’s likely to xxxx xxx xxxx xxxx (Non subscribers, click here to read this report).

Meanwhile, the dealers have mitigated some of their risk, but they and their big bank parents remain at great risk if bond prices start declining again. That should happen as liquidity begins to tighten again in xxxxxx xxx xxxxxx xxxxx. (Non subscribers, click here to read this report).

The bond rally should have a bit further to go, but I’d be a seller on the first technical signs that the trend is turning. And when bond yields start to rise again, and bond prices start falling again, I’d expect stocks to suffer from the same adverse liquidity factors that would be pulling the bond market down.

LATE BULLETIN! HOLY COW, as I was proofreading this report, I just checked the Treasury issuance schedule for this week, and the Treasury will issue $40 billion in new T-bills on  Monday. That will upset the apple cart. Let’s just accelerate the time frame for when I expect the market to begin experiencing tighter liquidity from xxxxxxx xxxxxxxxx, to the xxxxxxxxx x xxx xxxxxx. We need to be on the lookout for signs of reversal in the bond rally xxxxxx xxxxxxx  I originally thought (Non subscribers, click here to read this report).

But at least this news confirms my earlier forecast that the T-bill paydowns would end in July, making for tighter liquidity in conjunction with the Fed’s QT program. And lest we forget, they plan to double the amount of system withdrawals in that program beginning in September (Non subscribers, click here to read this report).

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