Liquidity To Collapse $1 Trillion In "3 Or 4 Months", Pushing Economy Into The Abyss

Little by little, the thesis we first laid out in January (when we explained how the drain of the Treasury's cash balance - or TGA - will boost risk assets and offset the Fed's tightening QT), and then followed up with its mirror-image two weeks ago when (in "Why The End Of The Debt Ceiling Crisis Triggers The Next $1.2 Trillion Banking Crisis") we explained how the coming $1.2 trillion refill of the TGA (now that the debt ceiling "crisis" has been resolved) would adversely impact stocks and the economy, is becoming conventional wisdom (which is troubling, as it means it is increasingly priced in, but that's the topic for a different article).

Consider yesterday's report from Deutsche Bank's Steven Zeng (available to professional subs) in which the rates strategist writes that the TSY cash balance via a surge in bill supply may result in a sharp drawdown in bank reserves, potentially interfering with the Federal Reserve’s quantitative tightening policy, which is precisely what we said two weeks ago.

Or consider Michael Hartnett's latest note (which we will detail in a subsequent post), in which the bearish BofA strategist says that "monetary policy remains the big dog and is set to tighten in coming months" and is also the "biggest reason we are not capitulating into risk despite price action." According to Hartnett, after an $8.9tn increase in 2020, $4.3tn in 2021, but then dropped -$1.1tn in 2022; global liquidity has jumped +$170bn so far in 2023, Jan thru Apr, driven by liquidity from the SVB collapse and the BoJ, but then it shrank by $50bn May and "is set to collapse more than $1 trillion next 3-4 months" as follows: "$100bn QT from Fed/ECB/BoE/BoC/RBA/RBNZ per month + $1tn T-bill supply +  $200-300bn rise in TGA + MMF outflows (from RRPs to T-Bills) = could approach a $1.5tn liquidity drain."