In the ongoing tradition of “one chart you should see this weekend,” the latest withholding tax data is definitely worth a look right now.
Total withholding tax collections are available to us virtually in real time in the US Treasury’s Daily Treasury Statements, released with just a one day lag, which makes them an excellent analytical resource. However, they are extremely volatile day to day so I rely more on a monthly moving average of the 11 day total collections, comparing that with the prior year. Smoothing sacrifices a bit of timeliness to get a clearer picture of the trend without losing too much of the edge that the daily data provides. Unfortunately, I have found even the 11 day total data too noisy for meaningful comparison so I’ve had to resort to additional smoothing, which ordinarily I don’t like to do. As a result the smoothed data is a little slow, so I also look at raw data trends to get a better sense of timing.
Withholding tax collections rebounded from a deep trough in April, in the month ended May 31…
You can follow my analysis of the government’s real time tax data on at the beginning of every month in The Wall Street Examiner Pro Trader Federal Revenues Report. This report is chock full of charts that clearly illustrate the current trends before the economic news hits the headlines.
The real reason to track tax data isn’t to tell us what the economy is doing. It’s for supporting data for the TBAC’s Treasury supply forecasts upon which we rely so heavily. While Wall Street is busy focusing only on demand for investment paper, it forgets the other half of the Law of Supply and Demand. We don’t. I cover both the demand and supply side.
The biggest supplier of investment paper to the markets is of course the US Government. So we pay close attention to how much supply it is scheduled to bring to market every month, and relate that to the prices of financial assets-stocks and bonds.
Bloomberg reports: “Trouble is brewing.”
All investments compete with US Government paper for their share of the pool of money available for investment. Investors and dealers must choose between asset classes all the time. Liquidity and investment preferences are constantly shifting. But one thing is constant in the current environment. The Fed is removing money from the system at an increasing pace. The liquidity pool isn’t growing any more, and soon it will start shrinking outright.
So while investors may choose stocks over other asset classes at any given time, such as recent weeks, the more Treasuries that come to market, the more money they will suck out of a stagnant pool. And as the Fed increases its draining operations, and the Fed’s two big cohorts-the ECB and BoJ-cut back on their QE programs, that pool of money will even start to shrink.
The current supply data is horrifying and it won’t get better any time for the foreseeable future.