Lee AdlerThe outlook for the most of the rest of October is bullish. But it’s not an endless bull any more.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
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.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
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.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
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.
Uh… No.
But some other stuff sure as heck is, and you need to know about it.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Well…
The selloff that we expected as a result of the scheduled month end liquidity shortage happened.
Just one problem.
It came a week later than expected. Unfortunately, in a business where timing is everything, that matters. When the selloff didn’t happen right away, I stopped expecting it. Ooops. Apparently we need to build into our forecasts an allowance for a one week lag between money injections and market reactions.
So this week, the market had a little Wile E. Coyote moment, looked down, and plunged. But suddenly yesterday, it sprang back to life.
Why? The Fed didn’t step in. It is maintaining its schedule of about $18 billion per week in Treasury purchases, and a similar or slightly larger amount of MBS purchases which varies according to the amount of MBS prepaid off the Fed’s balance sheet the prior month. No change there.
As we know, those are forward contracts which only settle in the third week of the month. The September settlements start Monday, September 14. We need to watch out for that.
In the meantime, Dr. Evil’s sidekick, Mr. Minus-chin, the keeper of the US Treasury cash hoard, rode to the rescue yesterday.
Should we expect more of the same?
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
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.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
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 and future reports risk free for 90 days!
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 bears. There’s still enough QE to keep this farce going, short term factors notwithstanding.
Last week was MBS settlement week (see last week’s QE update). That pumped $100 billion into dealer accounts. Not all of that showed up on the Fed’s balance sheet total assets because other assets were paid down in the. MBS get paid off in the normal course of business during the month. Some of the Fed’s superfluous alphabet soup programs have also had reductions.
But that stuff doesn’t really matter to the stock and bond markets.
Our focus is on the Fed’s securities holdings, in what’s called the System Open Market Account (SOMA). That’s where the action shows up. It’s the money that the Fed pumps into the financial markets through its straw men, the Primary Dealers. And that is still steadily growing.
Here’s what that means for the outlook and strategy.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
The forecast has changed. It’s less bearish, but it’s still bearish. Here’s why.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Macro liqudity been bullish since early July. That was no secret. We were fully informed and prepared. And it’s no secret that this balance is about to flip to bearish. Really bearish. Can our beloved Fed get ahead of that curve?
The US Treasury issued its quarterly refunding report this week. So we now know what to expect from the US Treasury. We already knew what the Fed’s plans were. It made its policy pronouncement last week. More of the same. Snooze.
But that expectation is only good for the balance of this quarter, that is, through September. The government’s forecast for debt issuance beyond that, for the last calendar quarter, and maybe even for the next 7 weeks, should be taken with 5 pounds of salt.
The Treasury Borrowing Advisory Committee (TBAC) does ok for the current quarter when it issues its estimate halfway through the quarter. It helps to know what has already happened for the first half of the quarter. But their look-ahead forecasts to the following quarters are usually revised significantly, and sometimes completely reversed.
So we’ll focus on what we can reasonably expect from now through September. Even though we don’t know how much the government will spend on economic relief.
Here’s the key takeaway.
Open the report to find out what it is, why it is, and what to expect.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
