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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. |
Yesterday we covered the treasury; today, let's discuss the Fed's double-edged strategy: vigorous rate hikes and Quantitative Tightening. While trimming its gargantuan 9 trillion balance sheet at a clip of roughly 100 billion per month, it's also increasing interest rates. The Richmond Fed made an observation last December. It stated that slashing the balance sheet by 2.5 trillion equates to an economic impact similar to a 50-basis point rate hike. However, it was candid in admitting the significant uncertainty surrounding this premise. A Fed admission of uncertainty? Shocked...
The effects of rate hikes are still playing through the real economy on a lag. Only now are we starting to see auto loan rejections higher than interest rates themselves. Mortgages headed the same way. These things take time.
An undeniable fact is the spike in bank failures this year, which amounted to 556 billion. This has led to the rollout of the Bank Term Funding program (that's the single green spike this year), temporarily hitting the pause button on the QT expedition. The reality that borrowing from the Fed's discount window and the BTFP is not cheap dawned on banks soon enough. The Fed, meanwhile, has been letting Treasury and mortgage bonds expire without reinvesting the proceeds. There remains a stigma attached to borrowing at the Fed discount window, and we still haven't seen a meaningful uptake there. It's good news. The Fed's QT has resulted in a conspicuous divergence between the trajectory of the NYSE and the direction of Fed liquidity, as highlighted in today's bonus chart. This discrepancy adds to a growing portfolio of "alligator jaws" charts, which cast doubts on the sustainability of the current risk rally.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
