There’s something very unique – and a bit sinister – about today, April 19.
Would you like to know what is fueling this stock market rally?
Since March 29, the Treasury has poured $114 billion of its cash hoard back into the market by paying down debt.
That windfall ends today… Thursday, April 19. From then on, Treasury supply will just keep building.
With the changes in the tax law and the Trump Regime’s massive increase in spending, those deficits are about to get a lot bigger. That has already begun to cause Treasury supply to mushroom.
Government forecasters and the TBAC project that deficits will increase for the foreseeable future. The Joint Committee on Taxation (JCT) of the US Congress says that the new tax cuts will add $280 billion to the deficit this year.
The Congressional Budget Office (CBO) just confirmed that we’re headed for massive increases in the deficit. This statement stands out in their April 9 report.
The deficit that CBO now estimates for 2018 is $242 billion larger than the one that it projected for that year in June 2017. Accounting for most of that difference is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.
Remember that this is for the fiscal year that ends in September, not a full calendar year.
This increase in the deficit will cause an increase in an already heavy Treasury supply forecast, which will pressure all markets.
Particularly shocking is that the CBO projects that revenue losses due to the tax cut will continue until 2026. Here are the CBO’s projected deficits for the next 10 years. It projects increasing deficits and thus increases in Treasury supply for the next 8 years.
In early February the TBAC released its estimate of new supply for the first and second quarters of 2018. The TBAC is a committee of Wall Street Primary Dealers and international bankers that tells the Treasury how much debt it will need to issue for the current quarter and the following quarter. It issues its reports in early February, May, August, and September. It recently issued a statement telling those of us who follow their reports that, “There’s nothing to see here. Move along.” Which means the opposite, of course. We need to keep paying close attention to what they’re saying. If anything, the Treasury has recently overshot the committee’s forecasts.
The February forecast called for $618 billion in net new supply in the first half of 2018. That would put the US on a pace for average deficits, and average new Treasury supply, of more than $100 billion per month immediately.
The TBAC even expected the government to need to issue $84 billion in new supply from mid April to mid May. That is notable because the Treasury normally pays down debt through that period. It uses the cash from the April tax collection windfall. Not paying down debt in late April is a sea change from the history of big paydowns over those four weeks that typically goosed the stock market. There would be no such benefit this year if the TBAC projection is correct.
Maybe the Treasury just accelerated the paydowns this year. Lo and behold, from April 5 to April 19 the Treasury is paying down $125 billion in outstanding debt. Most of that cash has already flowed back to the accounts of the erstwhile holders of the paper being paid down. The rest is coming on Thursday (today). Those holders include dealers, banks, and other institutions.
So, what happened? Stocks are having their April rally just a bit earlier than usual. More cash is coming on April 19 when the last of the paydowns settle. That could slosh around the market for another week or more, but then the tide will start going out again.
I would use the rest of April as an opportunity to aggressively lighten up on longs, and gather some shorts on the broader market.
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