Pro Perspectives 7/6/22

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July 5, 2022

This past Friday was a relatively quiet day for markets, heading into a long holiday weekend.  Yet, the 10-year yield traded from over 3% to a low of 2.79%.

We've since had lower lows this week.  And mortgage rates have dropped nearly half a point.
What's going on? 
Is there safe-haven buying of Treasuries, on the prospects of recession and war?  Probably.
But in addition to that, there was a very important release from the Fed after the close last Thursday (the last day of the month of June).  It was the Fed's report of domestic security holdings. 
Remember, June 1 was the official start of the Fed's quantitative tightening (QT) program.  This was the onset of a plan to extract $1 trillion of liquidity from the financial system over the course of the next year. 
And also remember, heading into that June 1 date, financial conditions had already tightened.  Stocks were already in bear market territory.  Mortgage rates had spiked (the fastest near doubling on record).
We questioned, in these daily notes, if the Fed would even be able to begin the process of shrinking the balance sheet (QT).  
Well they did, but not much.  They planned to sell $30 billion of Treasuries last month.  They sold less than $10 billion.  And they planned to sell $17.5 billion of mortgage backed securities.  They bought nearly $3 billion. 
So, the Fed told us they were going to aggressively attack inflation, by "expeditiously" raising interest rates, and "significantly" reducing the Fed's balance sheet.  They have done neither.  
After watching inflation rise to 8.6%, they raised the Fed Funds rate to just 1.5%.  And after promising to extract $47.5 billion worth of liquidity from the global financial system, they did only about $7.5 billion. 
As we've discussed along the way, this continues to look like a Fed that's trying to bluff it's way to curtailing inflation.  And they've done a pretty good job.  They have curbed exuberance and manufactured a technical recession with mostly words.
But the monetary policy tailwinds are still here.  Perhaps this is why the Nasdaq (higher growth, higher valuation stocks) have led the way the past two days (after this "QT" data has been circulating).  
For perspective, even while we may be in technical recession (two negative quarters of "real gdp"), nominal GDP is running north of 6%. 
After inflation, it may not be a feel good economy, but it's still a liquidity-fueled strong economy. 
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