This will be one of the busier weeks of the year with earnings, the Fed, lots of data, and a Treasury Quarterly Refunding announcement. There are many differing views on the QRA, and there is a good chance that that turns out to be a non-event. We will start to get the details on Monday afternoon, with the official releases coming on Wednesday morning.
I know some people on social media suggest that the TGA will be run down and that it will issue a wave of liquidity into the markets. I have my doubts about that. Could it move from its current $900 billion to around $750 billion? Yes. But is it likely to run down to $100 billion, probably not.
After all, if the Treasury issues fewer bills, some of that money that has left the reverse repo facility over the past several months may start to return to the reverse repo facility. If too much cash is floating around in the overnight funding markets, overnight rates will drop to the reverse repo rate of 5.3%.
So if rates fall too low, that money will find a home back in the RRP, which could work to drain liquidity from the system, especially if the reverse repo facility rises faster than the TGA falls.
Since the end of March, the overnight rate has been generally trending lower, and the cash in the repo facility has been generally trending higher. So, the details we get over the next couple of days could be important, especially if bill issuance is net negative.
Meanwhile, this week’s Fed meeting is probably more important for credit spreads than anything else. We know that financial conditions eased dramatically when the Fed pivoted and indicated rate cuts in December.
Still, that process started in November when Powell indicated that rate hikes were basically over. Will this meeting serve as the meeting that starts to tighten those conditions again if Powell indicates that the number of rate cuts indicated in March is likely to be fewer, with the June meeting taking all of them away? Possibly.
So far, the bottom for spreads occurred right around the March FOMC meeting.
One reason the Fed may remove all of the rates by June is that the April CPI swaps expect to show an increase of 0.34% m/m and by 3.4% y/y. Let’s face it: 0.34% is just 0.01% away from 0.35%, which then rounds up to 0.4%. If the CPI prints another 0.4% in April for the third month in a row, it won’t be good for the rate cut outlook.
Based on current CPI pricing, readings below 3.0% will be hard to come by between now and February 2025. So, if the Fed wants to see a series of good reports between now and when they start to cut rates, they may have to wait until May 2025—at least if the current trend continues and swap pricing is right.
This would imply that the 2-year Treasury rates continue to move higher and push through the bull flag.
The 10-year also moves higher and pushes on to around 5% after breaking above resistance at 4.65% at the end of last week.
This is probably why the dollar should also continue to strengthen, push higher, and break out of its bull flag.
Meanwhile, the S&P 500 rose this week to reach the 20-day moving average, is very close to the 50-day moving average, and is approaching the downtrend line. So, it would seem that this week will be instrumental in telling us whether the downtrend remains or not. If all of the above continues, then the downtrend in the SPX should persist.