Stocks failed again at a massive level of resistance, and the timing couldn't have been worse as the Fed's balance sheet contracts.

Stocks Face Challenges As Fed Balance Sheet Contracts

July 4, 2020


MACRO – SPY, Yields, Fed Balance Sheet

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The most important day of the year came and went on July 2, and while to some it may have seemed like it a bust, it may have been more telling of what’s to come then what you think. The employment report was strong and better than expected for June. However, continuing claims were not nearly as good, remaining reasonably steady around that 20 million level. 

Through the marvels of how economic data is calculated, there are now more people receiving unemployment benefits, then the number of unemployed people. Oddly, that is the first time in 50 years that has happened, which also happens to be just how far back the data goes. 

It is confusing because these are all seasonally adjusted numbers. The not seasonally adjusted data shows that there were 18 million people unemployed. Meanwhile, the continuing claims not seasonally adjusted show there were 17.9 million. So perhaps the numbers adjusted for seasonality are getting screwed up somewhere, I don’t know. It all very bizarre.

S&P 500 (SPY)

Regardless, the S&P 500 futures jumped sharply higher, rising to roughly 3,157 at the high point of the day following the report. However, the futures turned lower and continued to do so in the global session on July 3, finishing at 3,129. Why is this important? Because the S&P 500 futures have now failed for the 6th time at that level of resistance since June 11 around 3,150. But more important, is that level has been a massive region of resistance going back to the end of February. 


Perhaps the other issue on Friday was that the 10-year Treasury initially spiked on the job data and then slowly reversed lower throughout the day. 

Additionally, despite the better employment data, Fed Fund Futures are still pricing in negative interest rates by June 2021.

One has to wonder what it will take if the big headline employment report wasn’t unable to break the index out, coupled with the other positive news throughout the week. It is hard to say. This week we will get the Services ISM PMI report, and that is about it from an economic standpoint.

It seems like the S&P 500 has its work cut out for itself if it is going advance beyond 3,150 this week. 

Fed Balance Sheet

Additionally, the Fed’s balance sheet continued to decline this week. 

Based on the way the Fed is paring down its swap lines and Repo operations, it is likely that the balance sheet may have further to fall in the weeks ahead. The repo activity appears to have the most influence over the equity market, not QE.

Remember, QE is the purchase of bonds, and when the Fed buys bonds, it creates a credit on the excess reserve for the banks that hold their money at the Fed. When the Fed does a Repo, the Fed is taking bonds from the banks as collateral and in exchange giving banks cash and charging them an interest rate.  So as repo operations slow, this will mean less liquidity for the banks, and likely less money for the banks to “play with” in the stock market in the afternoons. 

Anyway, that is all I have for today. 

Enjoy your 4th!


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