To The Moon

Remember: June 1st is the first day of 2x Feds balance sheet runoff

Days ago,$Goldman Sachs(GS)$ published a discussion of "What-opportunities-markets-after-peak-flation-gold-answers" after the worrying about recession. They believe that (core) inflation in the United States may have peaked (May-June), and inflation in Europe is expected to peak in the next 2-3 months.

A important reason is: US Savings rate has just hit a 14-year low, and credit card debt is trending vertically. It means  "wage-inflation spiral " is unlikely to continue.

We have discussed in E-commerce is at stake? For retailers, the rapid price increase will not only hit the consumption demand of sensitive consumers, but also further accelerate the demand of consumers for wage growth and push up the spiral of "wage-price".

However, from the earnings in retail industry this quarter, not only the consumption power of consumers is constantly being consumed, but also the embarrassing stagflation situation of only raising prices but not increasing demand has taken shape. Because some retailers face involution, they would rather eat into their profits than lose customers.

Refer to  Walmart's record plummet means a lot, Here's the reason ;  

Retailers did tell an American Horror Story, But so useful

This situation cannot be maintained for a long time. Will market go bullish after inflation peaks?

Marketa are comprehensive consequences, including employment rate, manufacturing index, consumer confidence, interest rate , valuation , currency liquidity etc.

With the arrival of June, we must attach great importance to a known factor, balance sheet runoff!

On the first trading day in June, the Federal Reserve officially started the second scale runoff in ten years. The last time was in 2018,$S&P 500(.SPX)$ shrinked the most since the financial crisis in 2008.

"balance sheet runoff" is equivalent to the reverse process of quantitative easing (QE), but in a passive way (not renewed at maturity). It will also tighten the liquidity of the market. At the same time, the assets held by the Federal Reserve will also decrease, which shows that the scale of treasury and MBS held in the asset account will decrease, while the balance of reserves on the liability side will decrease too.

As we know, reserves are the basis of commercial banks' lending. If reserves fall too much, it will also inhibit the growth rate of M2 currency.

At the same time, we need to pay attention to the decline rate of reserves.One reason is that the institutions involved in overnight reverse repurchase transactions include money funds as well as banks. When asset price volatility intensifies, they may tend to hold more safe assets, resulting in more demand for overnight reverse repurchase, which will consume more reserves. Nearly oneIn the past month, the overnight reverse repurchase demand of American banks has been very high, and the single-day transaction volume once exceeded 2 trillion US dollars. On the one hand, it shows that institutional traders in the market have a strong demand for cash, on the other hand, it also means that they are trying to avoid risks at present.

Of course, it is also possible that because the current interest rate is low, the money fund has no incentive to lend funds to banks.

At the same time, directly reduce the assets of national debt and MBS, and reduce the deposit reserve will greatly affect market liquidity. Moreover, it is more concealed, and the Fed cannot monitor market liquidity in real time. Institutional investors with high demand for capital,Will have to sell more risky assets to get cash.

Institutional investors always will pursue risk balance in his portfolio. For example, the "20-80 stock-debt balance", will passively sell the equity positions once bonds holdings are decreasing.

BTW, The speed of this "balance sheet runoff" is twice that of the previous one.

Starting from June 1, the monthly total reduction will be up to 47.5 billion US dollars, including 30 billion US dollars of US bonds and 17.5 billion US dollars of institutional mortgage-backed securities (MBS). In three months, the Fed's balance sheet will shrink to $95 billion ($60 billion Treasury bonds + $35 billion MBS)

Therefore, starting today, we all need not pay attention to the impact of "balance sheet runoff".

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