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Stocks traded higher today following initial claims data, which was a bit higher than estimates. In the end, nothing happened, and the market had nothing else to trade on. There has been no significant data this week, and the only thing we get to tomorrow is the University of Michigan. Meanwhile, there will be a multitude of speakers tomorrow. Starting at 9 AM with Bowman, followed by Logan, Kashkari, Goolsbee, and Barr, and concluding again with Kashkari and Goolsbee (together).

With no real news, it is a good time to review the latest liquidity data since the Fed published the official reserves balances tonight, which showed reserves rising to $3.331 trillion from $3.317 trillion a week ago. Remember, reserves stood at $3.616 trillion on April 10. So during that time, there was a massive amount of liquidity that was sucked out of the system. It has been the largest decline in reserves that has occurred since April of 2022.

The Bank Term Funding Program also fell to $113 billion this week from $124 billion last week.

The odd thing, I guess, is how we should think about the BTFP and reserve balance. The BTFP is part of reserves, but the similarity remains interesting after looking at the chart and then overlaying it with the S&P 500. The reserve dip, coupled with the levelling off of the BTFP, could be tied to the sell-off in stock over the summer. The ramp-up of the BTFP and reserves in early fall correlated with the rally in stocks. Of course, the BTFP has declined since late March, and reserves fell sharply in April.

Maybe it is not as apparent until you push the S&P 500 back by four weeks. Then, things lined up much better than they had been. Historically, the delay had been around 3 to 4 weeks, but with the BTFP last year, things seemed to change, and it took me a long time to figure out how things were flowing. But now, with the BTFP drain taking place, it should be a bit easier to track. 

If you add in the FINRA margin data and push that back the same four weeks, it all fits nicely. I don’t have the margin data for April yet, but I wouldn’t be shocked if we were down quite a bit.

Of course, the question is, where does the market go from here? I don’t have a good answer. Based on the flows of liquidity, the idea of it going higher doesn’t work. If the theory is correct, as reserve balances fall, margin levels should fall, and therefore, stocks lose their source of liquidity. The data shows that liquidity has fallen significantly, and BTFP will only continue to drain.

We will see.

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