Image Source: Pixabay

This coming week will feature both a Fed meeting and a BOJ meeting. Equally important, Monday is a quarterly tax date, which should deliver a big boost to the Treasury General Account (TGA). On the same day, $78 billion in Treasury coupons will also settle. It’s possible the TGA could reach the $850 billion mark by the end of Monday. As of Thursday, the TGA stood at $682 billion.
 

(Click on image to enlarge)

The only real piece of good news is that on Tuesday, Sept. 16, there will be a pay-down of about $50 billion, which should help alleviate some of the pressure on reserves. Still, by the time the SOMA report is released on Thursday, I would expect the TGA to be around $800 to $850 billion, with reserve balances at or below the $3 trillion mark.

At that point, the liquidity drain from the TGA refill will essentially be complete. However, quarter-end pressures will likely push reserves even lower as we move toward Sept. 30.
 

(Click on image to enlarge)

SOFR swaps are already pricing in a Fed rate cut on Wednesday, which is why rates have been trading lower. What really matters, however, is the spread between SOFR and the effective funds rate.

Assuming a 25 bps cut pushes the effective funds rate down to 4.08%, then an overnight rate of 4.17 to 4.21 would put the spread between 9 and 13 bps above the effective Fed Funds—slightly wider than the 8 bps observed on Friday, when SOFR was at 4.41 versus the Fed Funds rate of 4.33%.
 

(Click on image to enlarge)

There is no doubt that liquidity will be tighter over the next two weeks, and the window for market turbulence is far from behind us. In fact, I would argue it still lies ahead, given the combination of liquidity pressures, VIX option expiration on Wednesday, quarterly options expiration on Friday, a Fed meeting on Wednesday, and both BOJ and BOE meetings on Thursday. Volatility is more likely to expand this week than contract.

The 10-year yield looks a bit overdone to the downside and appears due for some consolidation or a bounce.
 

(Click on image to enlarge)

There are plenty of recent examples showing that rates can steepen even while the Fed is cutting. How long bonds respond to a rate cut this week—and, more importantly, to the projected path of monetary policy—will be extremely telling.
 

(Click on image to enlarge)

Meanwhile, the stock market finds itself in an awkward position: overbought and flashing warning signs. A glance at the Wingstop indicator shows the broader S&P 500 is not in a good place. In fact, it looks eerily similar to January. Wingstop has an uncanny ability to trade about a month ahead of the S&P 500.
 

(Click on image to enlarge)

On top of that, we now have our “peak stupidity” indicator with Oracle, which has already given back 50% of the gains it made following the OpenAI contract.
 

(Click on image to enlarge)

More By This Author:

Is The Yen Carry Trade Propping Up The S&P 500?
Here’s What Could Happen Regardless Of The Fed’s Decision
Market Gains May Fade As Volatility Crush Runs Its Course