FRED is updated weekly with new Fed balance sheet data including all the juicy details on liquidity. The following report captures changes in a variety of liquidity signals, and provides insights to determine the potential future outlook for asset prices and liquidity in global markets.
Fed Total Assets (WALCL)
Current balance: 8,243,344 Million USD
Weekly change: -31,208 Million USD
WALCL Components
The primary variables in WALCL (total assets) include the following balances:
Treasury Securities (WSHOTSL)
Current balance: 5,080,981 Million USD
Weekly change: -2,055 Million USD
Mortgage-backed securities (WSHOMCB)
Current balance: 2,517,559 Millions USD
Weekly change: -20,500 Million USD
Loans (WLCFLL)
Current balance: 266,372 Million USD
Weekly change: -5,689 Million USD
Thoughts on Fed Total Assets
The biggest move of the week on the assets side of the Fed balance sheet was in MBS at -20B. The total move for WALCL was a loss of over 31B when piling on the other categories. Loans (WLCFLL) fell by close to 6B which is a relatively steep drop compared to recent drawdowns. Treasuries only fell by 2B, but there is a big tranche of notes and bonds scheduled to roll off at the end of the month.
The slow burn in loans now amounts to 88B in QT from the top in March going from 354B down to 266B. A similar process took place after March 2008 after the Bear Stearns collapse.
Initially the loans created a bullish move in SPX in March of 2008. Perhaps the psychology was similar at the time of the reaction to bank loans after SVB ran into trouble, but there are a couple of differences in how this is playing out today. The loans are being paid down at a slower rate this time around, but another difference today is that SPX continues to climb higher into July, whereas in July 2008 the market already made a lower low.
An important factor that was different at the time was the Euro, which had already topped against the dollar in 2008:
I will go into the reasons that the Euro plays a crucial role in liquidity and asset markets later on in the report. For now, it is interesting to note that the Euro topping in 2008, and the decline of EURUSD was an early indicator of a looming market correction.
Fed Liabilities (WLTLECL)
WLTLECL Components
The primary variables driving changes in WLTLECL (total liabilities) include the following balances:
Reverse Repurchase Agreements (WLRRAL)
Current balance: 2,066,975 Million USD
Weekly change: 8,290 Million USD
Treasury General Account (WDTGAL)
Current balance: 549,897 Million USD
Weekly change: 12,456 Million USD
Thoughts on Fed Liabilities
This is a big moment for the liabilities balances. As explained in last week’s report there is a trend of stabilization I was looking out for, and this week is the first time reverse repo agreements increased since I started the weekly report in May. Not only this, but WDTGAL has also increased this week, which solidifies this process of stabilization in the liabilities.
Why is this such a big deal?
Would it surprise you if I said that the entire bull run starting at the lows in October 2022, was largely facilitated by the outflows from these liabilities? Consider the following chart:
When people say we went through a bear market already, and are now in a new bull market, do they realize that the entire 2022 move, and most of 2023 have been nothing but a big liquidity slosh? By summing RRP and the TGA in a combined signal, we can see the cumulative effects of the liabilities on SPX above. Even before QT started, and well before any rate hike there was massive liquidity moving into RRP and the TGA. This soak led to a cumulative RRP+TGA double-top that perfectly coincides with the SPX bottom in October.
As soon as the RRP+TGA balance fades and forms a downtrend, SPX is off to the upside. As the trend has continued, SPX and other assets have enjoyed this consistent flood of liquidity back into the economy and markets.
But what if the flow stops? Today we have our first indication that this may be the turning point as RRP bounced upward on the weekly data print for the first time in 7 weeks, and the TGA is stabilizing near 550B.
This also indicates that the so-called bear market of 2022 was not actually a result of rate hikes or QT. It’s possible that not even half of the rate hikes are being realized by the economy yet. It will take time to prove that the lagging effects from rate hikes are able to be absorbed by the economy. Considering the last rate hike happened this week, there is a long way to go for the economy to fully absorb the effects.
Non-US Central Bank Assets
Taking a look at the DXY weekly chart with CBDET, the totals for non-US central bank assets might not be that alarming, but taking a closer look at ECB and JPY assets, it’s been a wild week out there.
The DXY initially had some trouble regaining the critical level of 101.3, but it eventually overtook it with a strong move against the Euro.
What we’ve seen this year, and really since the DXY topped in September of 2022 can largely be attributed to one key relationship between the Fed and the ECB.
A short DWS article describes the ECB tightening regime, which has executed a waterfall of 1.6T Euros since late November 2022, and created a significant rally in the EURUSD pair as a result.
The biggest ECB asset drops come from TLTROs (Targeted Longer-Term Refinancing Operations). The most recent TLTROs roll-off was over half a trillion Euros worth of QT. This is the last TLTRO maturity until June 2024, according to the article.
On a side note, I really appreciate the title of the article: ECB balance sheet falls but no one may notice
I noticed, and I’m trying to get others to notice as well, because this could be the catalyst for one of the most impactful market turning points in 2023. Why? If TLTROs are finished dumping for a year, and the ECB bonds are maturing at a rate of 28B/mo on average, then the Fed is going to outpace the ECB tightening for the foreseeable future. This could mark the top in the EURUSD pair, and eliminate one major bullish tailwind for assets. Consider the following chart with various assets compared to the ECB tightening, and EURUSD:
The US reducing the balance sheet at a faster pace than the ECB in conjunction with the TGA and RRP trend reversal would compound to create a significant momentum shift for liquidity and markets.
Stocks and Bonds
SPX made an interesting move in today’s session, printing a large red engulfing candle on the daily timeframe. This past week has seen many negative days for liquidity according to CBDEO, and CBDET is nearing the recent local low again.
ICDO is signaling a rise in COR3M which could be the start of a swing in the correlation index, and it would imply higher volatility to come. The divergence in CBDET still indicates a major correction is possible all the way back to the 3800s. Based on macro factors it does not seem likely that liquidity will rise to meet price where it is.
We seem to be in the middle of another attempt by the bond market to steepen the yield curve. The 10y - 2y inversion is bouncing back upward again.
By adding TLT (orange) to the QQQ chart, with CBDET (purple) the preference for stocks over bonds is revealed.
This indicates an imbalance between safe haven assets and the riskier growth names. Rotation into other sectors, or even small caps has caused a bit of a wobble in the tech sector. SPX made a higher high, while the leading performer, QQQ, was shut down before raising the bar. This recent behavior reminds me a bit of early February when distribution took place, and left the market weak. Without new liquidity to support a broader distribution there could be volatile times around the corner. Of course last time this happened, we got the bank loan liquidity infusion.
Bitcoin
WRESBAL moved down 58B this week, and the price line moves down to about $24,400.
Bitcoin has been showing signs of weakening. On lower time frames there are bearish consolidation patterns, and a recent sharp move down bounced below the 29k level. Because liquidity remains low there is still room to go down, and if the Euro topped against the dollar (as discussed in an earlier section), this also confirms major headwinds are going to keep BTC from performing well.
Losing the 200 week moving average near 27k would be a bearish sign, but the bulls have kept price buoyant so far. It will be interesting to see if there is a significant reaction to the tranche of QT melting off in a couple days.
Conclusion
Fed liabilities appear to be stabilizing, removing a major bullish liquidity factor from the markets. The ECB may be shifting to a less hawkish regime than the US for the time being, and if the Euro top is in, it is another major liquidity factor that turns the other way. Stocks are still overextended, and concentrated with correlation near historical lows. If the tides are turning here, it should become more apparent with the next liquidity report, so stay tuned.