7 Monster Stock Market Predictions: Fed's QT, Less Liquidity, More Stock Slides

 | May 09, 2022 01:10AM ET

It is going to be one busy week for the markets, with the CPI and PPI reports, along with 10-Yr and 30-Yr auctions.

CPI will be released on Wednesday and is expected to have risen by 0.2% m/m and by 8.1% y/y in April. PPI will come on Thursday, and it is expected to have increased by 0.5% m/m and by 10.7% y/y.

The 10-yr auction will arrive on Wednesday at 1 PM ET, and the 30-Yr auction will be on Thursday at 1 PM. The auctions have become must-watch events, as they can be market moving these days.

Many people think the market is going back to an all-time high based on numerous forms of technical analysis or other methods. In my opinion, I don’t see how that’s possible any time in the near term, given the plan the Fed has laid out.

h2 1. Fed, QT, And Liquidity - Or Lack Thereof/h2

There are only four words you need to tell yourself every day you wake up, DON’T FIGHT THE FED. The FED is working to do two things to make it very difficult for the markets to go to new highs: tightening financial conditions and will now drain the balance sheet.

The Fed hasn’t even begun to reduce the balance sheet, and reserve balances are already falling. One reason why balances are dropping is that QE stopped.

The second reason is that the overnight reverse REPO operation increases nearly daily, which drains liquidity from the systems. The final reason is that the US Treasury removed a massive amount of money from their general account held at the Fed.

The reverse Repo activity isn’t likely to subside; I think it will continue to increase as the Fed has raised the interest rate on the facility to 80 bps.

Separately, the Fed has now announced that QT will begin in June. That means less liquidity will be available to go into the stock market in the form of margin and leverage.