By Kevin Muir
Today’s post will be short and sweet as I want to get it out close to the stock market open.
There is over $28 billion rolling off the Fed’s balance sheet today.
As readers will recall, I believe the QT maturity days result in an outsized negative effect on risk assets (Pink Tickets on QT Days).
However, last month (Mark It On Your Calendars) did not work that well.
Instead of a big down day, spoos were roughly unchanged.
Do I think the QT effect is dead? Not a chance. But I am not sure if today is the day it reasserts itself.
Given yesterday’s big stock market decline, we are already working from an oversold level. That would give me pause, but then we have two other central bank developments that introduce a bullish bias.
The first is last night’s Bank of Japan meeting. Contrary to the bearish financial pundits who believed the BOJ would abandon its ultra-accommodative monetary policy, the actual announcement was nowhere near as hawkish as rumoured. This has caused the Yen to be offered and risk assets bid throughout the globe.
The second, and potentially the real worry for bears, is the FOMC Drift. No, that’s not Vin Diesel’s new financial show on Real Vision, but the tendency for the stock market to rally into the FOMC announcement.
What’s especially funny about this bias is that the Federal Reserve is aware and has even written about it (The Pre-FOMC Announcement Drift by Lucca and Moench – FRBNY Staff Report):
So will the “FOMC Drift” beat out the QT Maturity negative bias? Not a clue. Combine that with the fact it is month end, you have the recipe for a day that could truly go either way.
Thanks for reading,
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