Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
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BONUS CHART We're delighted to welcome our new Tier 1 newsletter readers. Each day, we feature a bonus chart highlighting interesting macro trends. This year, there's been a growing disconnect between flows and deteriorating macro data, fueled by volatility suppression and systematic buying against a backdrop of slowing growth and a fiercely hawkish Fed that would make pterodactyls look timid. |
The Federal Reserve has been directing headlines with its assertive rate hikes and a commitment to trimming its mammoth $9 trillion balance sheet by roughly $100 billion per month. We say roughly because there have been QT disruptions along the way. As per a December article by the Richmond Fed, a $2.5 trillion reduction in the balance sheet is roughly equivalent to a 50-basis points rate hike in economic impact, although they admit there's significant uncertainty around this estimate. Fed, uncertainty, doesn't seem like them.
This year has seen a rise in bank failures totaling $556 billion, leading to the introduction of the Bank Term Funding program, which temporarily halted the Quantitative Tightening (QT) agenda. Banks have realized that borrowing from the Fed's discount window and BTFP is costly. As we highlighted yesterday, the borrowing has been taking place in the FHLB. The Fed has allowed Treasury and mortgage bonds to mature without reinvestment, and in today's bonus chart, we note a widening divergence between the S&P 500 and Fed liquidity. This adds to an array of "alligator jaws" charts raising doubts about the sustainability of the risk rally. We are witnessing the most significant divergence between Fed liquidity and SPX. Ultimately, folks, it all comes down to flows.
