The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets.
Stock prices are currently right in the middle of the channel surrounding the liquidity line in the Compositite Liquidity Chart (viewable in subscriber version). By this measure the market isn’t overbought, as so many bearish pundits are bellowing. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.
The balance between QE and Treasury supply will remain bullish through through xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay for another month or two.
However, this is not as bullish as I first thought. It appears that around 75% of the T-bill paydowns are going to money market funds and other institutions who must hold short term instruments instead of lengthening maturities or buying stocks. So most of the cash from the paydowns is ending up in Fed RRPs.
Only about ¼ of the money has been used to buy stocks and bonds. So the effect has been muted. There’s no massive blowoff. Instead conditions lend themselves to a churning topping action lasting through xxxx (subscribers).
The balance between QE and Treasury supply has gotten even more bullish and will remain so until xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay until xxxx (subscribers only).
I have previously made the case for the Treasury to run out of money in xxxx (subscribers). If that estimate is correct, the outlook will turn negative in xxxx (subscribers). But for now, bullish liquidity forces remain in place, outside of the usual month end supply pressure.
As delayed tax receipts come in, in May, the Treasury will have even more cash for paydowns. The rest of May into mid June could be very bullish as a result. A selling opportunity for both stocks and bonds will arise as the Treasury approaches the point where its cash hoard is used up.
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The balance between QE and Treasury supply remains bullish. This should provide an underpinning preventing the stock market selloff from going too far. At the same time, Treasuries have apparently put in an intermediate term low.
May will be even more bullish, but there are trends in place that will end the party, and we have a pretty good idea of when.
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