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Missed the Rally? Ho Hum. Good! 5/3/22


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I missed yesterday's stick save. I was busy working on this. 

The Fed is Tightening Into a Sheet Storm

As Potatohead pointed out late yesterday, one member of the Twitterati believes that the bottom is in on the news of the quarterly Treasury Refunding announcing a net paydown in Q2, already half done, and reduced issuance for Q3.

https://twitter.com/dampedspring/status/1521210994005102592?s=20&t=zZY3YdRiiJ7ymuEi-Su19g

Apparently this worthy pundit saw this coming, as he should have because the strength in tax collections was hardly a secret. But he misinterpreted its meaning. 

This is not "the bottom." It is not even the top of the bottom, but it is, for now the bottom of the top. The question is, how long. Maybe we're finally going to have that paydown-driven rally that I've been forecasting since well before the last Quarterly Refunding announcement in early Feb. After all, with the exception of the pandemic lockdown years when tax collections were delayed until July, there are Treasury bill paydowns and reduced coupon issuance every year in the second calendar quarter.  

Here's the most recent update I posted on Federal revenues. 

Why March Withholding Taxes Showing Red Hot Economy Is Bearish

I will be updating that later today with the complete data for April. Have to wonder if the strength in tax collections continued. Again, this is something that I have reported on ever since the end of Lockdown One, when stimulus worked-- that massive growth in tax revenues would reduce the deficit. I had even done a swag that we would be looking at average deficits, and average net new Treasury issuance of $60 billion per month this year. 

Indeed, the new refunding announcement suggests that that number is right on. They're forecasting net borrowing of $182 billion for Q3. 

Constan reaches the wrong conclusion because he says that that's less than the amount that the Fed will shrink it's balance sheet each month. 

So what. The Fed had to buy $100 to $200 billion a month or almost 90% of Treasury issuance just to hold yields level. Since March, it's been buying zero. We see the result. What happens when the Fed starts QT and tells the Treasury to pay me back $60 billion a month of the money I lent you or I'll break your fucking kneecaps with this tire iron I'm slapping against my palm?

The market has already spoken. The fact that the US Treasury announced something that we already knew about for months and months and months changes absolutely nothing. Some big futures traders yesterday thought that it did. They are mistaken. 

Fear driven spike rallies like yesterday's are de rigueur for bear markets. They happen when shorts get surprised and panic out of their positions to protect profits. The problem is that that short covering leads to even less demand down the road. If the bulls don't take the handoff, the market rolls over and slides again. 

That's what I expect here, if not today, then after tomorrow's FOMC Circus.

Looking at the hourly bars of the 24 hour S&P fuguetures (ES) we can see that it was no accident that the market rallied where it did. Right from trend support. And that it stopped where it did, right at trend resistance.

tvc_0774fcec3dfa521567046c12ba55440a.png

So the parameters for today and tomorrow are now clearly set. If there's to be meaningful upside, they'll need to clear first 4181, and then the 4195 area. Failing that, the downtrend will be squarely intact. Then the level to watch on the downside for a crash signal would be 4050.

I can't imagine that breaking today with the Fed Circus on the docket for tomorrow. The PPT (aka the President's Working Group on Financial Markets will be watching this chart, and just as they held the line yesterday afternoon, they'll certainly do so again today and tomorrow if challenged.  Here's how it looks on the 5 hour bars. 

tvc_4e89bf7c0b4f9dcd78a556b80c2ef934.png

 

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