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In recent years, liquidity has played a pivotal role in driving the movements of equity indices in the United States. The injection and subsequent withdrawal of excess liquidity have closely correlated with the performance of the S&P500. Traders seeking directional bets have found that analyzing liquidity alone can provide valuable insights into predicting the movements of the S&P500. In this post, we will delve into the current scenario, highlighting a significant deviation between liquidity levels and the S&P500, and its potential implications.
Liquidity Divergence:
At Airtham, we have diligently tracked and shared instances of liquidity deviations in the public domain. Presently, a visible discrepancy between the S&P500 index and liquidity has emerged. Despite the S&P500’s continued ascent, liquidity remains stagnant. Unless the Federal Reserve (Fed) abandons quantitative tightening (QT), the prospects of increased liquidity seem bleak, casting doubt on the sustainability of the ongoing S&P500 rally.
Debt Ceiling Resolution and its Impact:
Compounding the liquidity concerns, a recent agreement has been reached on the debt ceiling issue, which should lead to an influx of treasuries flooding the market. The issuance of bonds typically drains liquidity from the markets. Unless the Fed opts to expand its monetary base, a further decline in liquidity appears imminent. This situation could potentially exacerbate the impact of reduced liquidity, creating an environment akin to quantitative tightening on steroids.
Trading Opportunities:
Let’s reflect on a notable trading point – March 15, 2023. During this period, liquidity surpassed the S&P500 index following the Fed’s introduction of $300 billion in liquidity to support failing banks. At that time, this became a prime “BUY” signal for traders. However, given the current circumstances, the tide has turned, and this point now seems like a compelling “SELL” signal. Liquidity is steadily dwindling, while the S&P500 continues its upward trajectory, largely fueled by the recent AI frenzy.
Don’t get carried away by the recent frenzy.
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.