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: 8,208,241 Million USD
Weekly change: +1,477 Million USD
WALCL Components
The primary variables in WALCL (total assets) include the following balances:
Treasury Securities (WSHOTSL)
Current balance: 5,048,370 Million USD
Weekly change: +345 Million USD
Mortgage-backed securities (WSHOMCB)
Current balance: 2,517,559 Millions USD
Weekly change: 0 USD
Loans (WLCFLL)
Current balance: 260,386 Million USD
Weekly change: -1,725 Million USD
Thoughts on Fed Total Assets
This week’s data reflects a dead zone for QT where neither MBS nor treasury securities went down on the assets side of the balance sheet. Treasury securities actually creeped up a bit, and this may be due to the expected $60+ billion in maturities later in the month. If the Fed has more than 60B maturing, they have to offset this by bidding in the treasury auctions. The bigger point to drive home is the fact that the beginning of this month saw outflows from the TGA and even some from RRP on some days, without much QT in this first half of August window. The second half will be much different with major QT coming on the 15th, along with opex week.
Loans in total went down 1.7B, while BTFP continues to climb to new highs in small increments. This week’s BTFP addition was $654 Million. The banks must still be in need of that emergency liquidity, which is an interesting signal. Maybe not something that can move markets upward, but a band-aid that can keep the house of cards from tumbling. Does it say something about how close the system is to some kind of major unwinding, or bank run? Perhaps it’s nothing to be alarmed of, and maybe even more reason to throw caution to the wind since the Fed always seems to find a way to keep the engine in this leveraged economy puttering along.
Fed Liabilities (WLTLECL)
WLTLECL Components
The primary variables driving changes in WLTLECL (total liabilities) include the following balances:
Reverse Repurchase Agreements (WLRRAL)
Current balance: 2,072,409 Million USD
Weekly change: 5,434 Million USD
Treasury General Account (WDTGAL)
Current balance: 432,262 Million USD
Weekly change: -28,664 Million USD
Thoughts on Fed Liabilities
The weekly reverse repo balance is up 3 weeks in a row, but the TGA has been draining a lot more viciously in the first half of the month, coming down over 117B in 2 weeks. What effects might this have? Now is the time to see if markets respond differently to liquidity. We’ve seen a good amount of selling and corrective moves in stocks. If the risk off switch has been flipped then maybe this won’t save the bulls from a continued drag on asset valuations. Based on the movements in yields it doesn’t seem like the bond market is catching much of a bid lately either, except for when Yellen needs to print some 10-year notes, and the Fed comes in to pick up their runoff paper.
The end of the fiscal year is end of September, and this is when we might expect the TGA balance to be refilled. There isn’t a massive amount of time between then and now, so maybe this ejection is just an early month expected spending spree that will won’t sustain momentum, in which case markets may not be too affected.
Non-US Central Bank Assets
The DXY is still showing some strength since last week, holding the 50 dma, and giving stocks a hard time in the process. Long yields have pushed higher giving the dollar some added strength, but do yields have much higher to go?
When it comes to yields, the 10-year is close to where it was when the Silicon Valley Bank issues sent yields down. The reason yields went down at the time in March is most likely a bet that the Fed would have to pivot and cut rates due to too much systemic destruction in the banking sector.
This is where BTFP and the discount window loans are creating a counterintuitive conundrum for the economy. Since the Fed didn’t have to pivot, now they have to watch the bond market potentially collapse, and yields rise even further. There are many instances of “rate hoarding” going on where pandemic ZIRP rates are creating a runway so that refinancing could wait.
Now all those hoarders of low rates who didn’t want to refinance on the way up might find themselves with much higher rates when it comes time to roll those loans, buy that new car, sell or buy a home, or refinance corporate credit. The hold-outs may find themselves worse off than if they had just refinanced earlier. This is why lag effects will likely be worse than expected, when rate hikes start to be absorbed in the economy.
Adjustable rates are another issue, particularly in the Commercial Real Estate business.
Inflation and Liquidity
Last week I was preparing readers for a bounce in CPI, and the bounce came in at 3.2% YoY after a 3.0% print last month. Oil has also been in rally mode recently, but the important question remains: Is this inflation bounce implying a reflation run-up which will cause even more rate hikes?
In my humble opinion the Fed should not have to raise rates much further, if at all, but it will depend on how the inflation story plays out. To look ahead at what inflation might do I tend to look at liquidity as a leading indicator. This is what tipped me off to a bounce in CPI in the first place, and the timing was spot on.
Take a look at DBC (commodities index) vs liquidity in the following chart comparing WRESBAL-WLCFLL (liquidity minus loans).
The first thing to notice is that the structure is very similar, but DBC lags WRESBAL by roughly 12 weeks. We’re currently at 9 weeks after the last liquidity peak/bounce that appears to be a catalyst for this rally in Oil and other commodities. It’s possible that we’re within 3 weeks from topping out in DBC based on the liquidity effects. Maybe something else can come up that changes the dynamics, but at least for now the data suggests that if WRESBAL continues down, commodities could follow.
Bitcoin
The WRESBAL line still sits at about $26,000 but the corn doesn’t want to come down from a range near the 29k support. Liquidity injections from RRP have tracked well with the price movements of BTC.
Ultimately the direction of Bitcoin probably will come down to the direction of liquidity. WRESBAL appears to be consolidating mostly sideways and so is BTC. Which way it breaks likely has to do with the fundamentals of liquidity and how it gets created or destroyed. We’re still in a QT & rate hike regime, so there’s certainly downward pressure from that aspect. Another powerful factor is the dollar, and the recent changes to the QT velocity at the ECB vs the Fed. Yet a third important factor is going to be risk appetite in the markets. As yields rise, and risk levels heighten, lower central bank balance sheets, plus a stronger dollar might be enough to change the liquidity bias to safer havens.
Then the ultimate question would be answered: Is Bitcoin considered to be a safe haven by the market? It probably could be considered safe in terms of its properties allowing it to operate securely outside of the traditional system, but physical gold is similar, and gold also gets a lot of its dollar denominated value from the expansion of the money supply. This means if shrinking liquidity creates a dollar rally, I see it unlikely that gold and Bitcoin will have a good time in these conditions, and it’s more likely that traditional safe havens such as treasuries, and the dollar will soak up the bulk of the liquidity pool in a recessionary move, but that’s just my humble opinion, and I could be totally wrong.
We have to remember that Bitcoin hasn’t lived through a deep and prolonged recession at all. Early 2020 was a technical recession, but very short and unique given the central bank response to the pandemic. This means that we are yet to see what Bitcoin will do if we enter such a phase in the economy.
Conclusion
The window of hope for bulls is closing by next week as QT took a break, and the TGA ejected over $117B early in the month, but what if risky assets don’t respond? Where is liquidity going now, and does it indicate risk off behavior? Maybe it’s a bit early to tell but there have been signs that this could already be the case. It doesn’t help that yields hit March bank failure levels again, and it seems like the bond market couldn’t be more bearish lately.