Darius joined our friend Anthony Pompliano this week to discuss the Q2 Quarterly Refunding Announcement, US Liquidity, the outlook on asset markets, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. Janet Yellen Sent A Hawkish Message To Investors Via The Q2 Quarterly Refunding Announcement
This week’s release of the Q2 Quarterly Refunding Announcement sheds light on the Treasury’s net financing estimates for both the current and upcoming quarters, projections for the Treasury General Account (TGA) balance, and more.
Within the announcement, two key data points stand out: the Privately Held Net Marketable Borrowing totals for the current and next quarters, and the Treasury General Account Target Balance. For the current quarter, the Federal Reserve estimates a need to borrow $243 billion in net marketable borrowing from the private sector, marking a $41 billion increase compared to the previous Quarterly Refunding Announcement.
Looking ahead, projections for privately held net marketable borrowing for the next quarter have surged to $847 billion, representing a significant $604 billion uptick from the preceding quarter. This increase coincides with a notable $100 billion raise in the TGA account target balance. These figures paint a picture of a Treasury issuing a decidedly hawkish signal to market participants.
2. US Liquidity Dynamics Shifted Negatively In April
We track US Liquidity via our 42 Macro Net Liquidity model which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance.
Throughout much of 2023, the Treasury adopted a net financing strategy aimed at accessing the surplus funds held on the Federal Reserve’s balance sheet, primarily through the reduction of the RRP balance. Beginning last year at $2.5 trillion, the RRP balance has steadily decreased to its current level of $506 billion. This move notably bolstered asset markets.
However, since the start of April, both the RRP and TGA balances have shifted in a manner less supportive of liquidity, actually draining it. This trend has contributed to the recent correction observed across asset markets.
3. The Backdrop For Asset Markets Is Becoming Less Bullish At The Margins
Our “Resilient US Economy”, “Green Shoots Globally”, and “China Front Loading Stimulus” themes persist, all of which are supportive of asset markets.
However, our “Sticky Inflation” theme is now a dominant driver of asset markets. Moreover, the US Dollar has broken out to a bullish condition according to our Volatility Adjusted Momentum Signal. This is significant as the Dollar’s movement is inversely correlated with global liquidity on a coincident basis.
Presently, we are witnessing a transition from a simultaneous dovish stance in both Fed and Treasury policy towards one that is net neutral, given the Treasury’s hawkish pivot this week. This shift represents a less bullish environment for asset markets.
That’s a wrap!
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Have a great day!
