With traders finally accepting the reality that Quantitative Tightening means collapsing liquidity, tighter financial conditions and – obviously – lower asset prices, especially in the aftermath of Powell’s “autopilot” comment regarding the Fed’s balance sheet rolloff which sent markets tumbling during the last FOMC meeting…
… Nomura’s Charlie McElligott reminds us of his October call anticipating a “financial conditions tightening tantrum” which was based-upon the enormous “global QT impulse” that month, for one simple reason: January 2019 should see similar “tightening” as the Fed’s balance-sheet run-off continues (including two heavy weekly QT periods during the first- and third- weeks of January). And that’s not all: in a world of fungible global liquidity, January will be hit with the double whammy of it being the first month following the cessation of the ECB’s bond-buying program.
So for those who – correctly – view the shrinking Fed balance sheet as one of the most important drivers of (declining) asset prices, and who also expect a self-fulfilling prophecy emerge as traders avoid buying stocks on major QT days (which may result in aggressive selling) here is the calendar of January – and 2019 – days that have the largest balance sheet shrinkage, courtesy of Nomura’s George Concalves. Will it be right? We’ll know as soon as the first trading day of 2019, when $18.2BN in TSYs are set to mature.
Putting the Fed’s projected balance sheet shrinkage in context – assuming of course Powell doesn’t fold to pressure and halt QT – this is how the Fed’s asset holdings will look like in 2019.
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