The FED: Dovish Fed and a Liquidity Discussion
Executive summary: The Fed wants stocks up, and key evidence is building that Treasury Secretary Yellen will unleash TGA QE ahead of Election Day.
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Dovish Fed
On Saturday night I said:
At the risk of beating a dead horse, I have a VERY hard time seeing policymakers allowing a sharp drop in markets at 9:30am EST on Monday.
That is precisely what is playing out so far in today’s trading, even if it’s not overly obvious.
This morning FRB New York President John Williams - a key member of the “Troika” (i.e. FED Chair, Vice Chair, and FRB NY President) - went on Bloomberg to talk down the policy ramifications of the very hot inflation report out last week. He already spoke post-CPI on April 11, so the fact he was out this morning is no accident: The Fed put strike price is right here at current SPX levels.
With the entire UST curve up substantially, it may seem counter-intuitive that stocks could continue to levitate; but higher rates and stocks is precisely in line with the current stance of FED policy that I’ve deemed “H4L Rates and Stocks”, as discussed here and here.
Williams’ comments are critical, as, again, he is a member of the Troika. But to reiterate the “put”, former FRB St. Louis President James Bullard was also sent out to reiterate that a soft landing remains on track, albeit on a longer time frame.
Liquidity Discussion
For almost a year now I have flagged Election Year dynamics as critical to equity market performance in 2024, and these dynamics are playing out in spades as illustrated by the fact SPX is trading at over 20 times 2024E EPS despite numerous long-term macro headwinds continuing to strengthen. In short, as detailed in the March WOTE Report, my thesis is that FEDeral government policymakers will do whatever it takes to boost the economy and equity markets into Election Day. There’s a reason SPX has yet to pull back more than 3% so far YTD despite a reacceleration of inflation, rising rates, and escalating geopolitical tensions on three key fronts (Ukraine-Russia, Israel-Iran, Taiwan-China). It’s not tinfoil hat analysis - it’s reality.
Front and center to the FEDeral government put that sits beneath this market is the Treasury General Account (TGA), which as of April 10 sat at around $700 billion1. (And that’s before the roughly $300-500 billion that is set to flow into it in the coming days and weeks from tax payments.)
There is a heated debate going on in FED Watch2 circles regarding what Secretary Yellen will do with the TGA ahead of Election Day.
There is nobody better on financial market plumbing than Andy Constan, and he tends to be of the mind that Yellen is not overly political in how she uses her “tools”. I am far more skeptical and have respectfully, albeit consistently, taken the other side of his conclusions. With that said, given Constan’s default stance, it’s very notable to me he is open to the possibility a strict reading of the “law” could underwrite an unleashing of a TGA QE program ahead of Election Day, as discussed in his recent interview circa minute 27:42 below.
Don’t fight the FEDeral government.
“FED Watch” = FEDeral Government Watch.