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Bonds rallied but stocks were left in their wake last week. There should have been plenty of cash around after Tuesday's huge settlement of $61 billion in net new Treasury paper was put to bed, but the boys threw a stock market party instead of paying the bill for the Treasuries on Tuesday. That left them with a hangover for which they paid a price the rest of the week in spite of the gusher of incoming cash from the Fed and Treasury.
The Treasury paid down T-bills to the tune of $10 billion on Thursday and the Fed pumped in another $14 billion from Wednesday to Friday. All of that cash high tailed into the Treasury market, ignoring stocks. The charts suggest that yields will fall further as the insane Treasury buying panic continues. That's bad news for stocks.
At the same time the dollar charts are weakening. The dollar may not break down immediately, but it's looking much lower over the longer term. Good news for gold.
The Treasury calendar is heavy next week, with 3 and 10 year notes and 30 year bonds scheduled in addition to the weekly bill auctions. However, the big settlement doesn't come until the 15th when $62 billion in new notes and bonds settle. About $9 billion in T-bills will be paid down on Thursday. There should be another $20-25 billion in POMO this week on top of that. So there should be plenty of cash around to rally both stocks and bonds. If bonds again get all the love, stocks will suffer again. We'll have to keep a close watch on the technical indicators to get clearer indications of where the flows are heading.
The final month to date Treasury data on receipts and outlays for May is mixed and difficult to compare directly due to calendar differences, but it appears that whatever upward momentum had existed in tax collections has waned. This was confirmed by the employment data release, which I analyzed, and for which I was roundly criticized, in an article in Marketwatch. It seems that everyone read the headline, and not the article itself. That article was a sanitized version of my complete thoughts, which I subsequently at The Wall Street Examiner.
An analysis of the rate of outlays and tax refunds suggests a sharp drop-off in stimulus effects over the past 8 weeks. As I have repeatedly pointed out in these Treasury updates, that should have led to weakening economic data, and it has. That should only worsen as the government cuts spending and the Fed takes a "wait and see" break on POMO.
This article is excerpted from the executive summary of the Wall Street Examiner Professional Edition Fed Report. The full 19 page text with charts is available to subscribers. A risk free trial is available.