due to strong housing report and expected more Fed tightening. The problem is that financial conditions are too loose despite Fed tiightening. That is nowhere more evident than in the ever increasing stock market. And such loose financial conditions mean the Fed will not be able to control inflation. Here's an interesting commentary from Doug Noland at
Credit Bubble Bulletin : Weekly Commentary: Nietzsche on Bubbles
Excerpts:
It's one freaky “tightening” cycle when you see such rampant financial sector inflation. Z.1 data help illuminate why the financial system has remained awash in liquidity. It’s also helpful to recognize the phenomenal inflation of Household sector liquid assets since the start of the pandemic. An analytical focus on declining deposits and the M2 monetary aggregate misses a crucial dynamic.
While Total (checking and savings) Household Deposits dropped $415 billion during Q1, Money Market Funds jumped $300 billion, or 39.1% annualized. Treasury holdings surged $549 billion – with Agency Securities up another $280 billion.
Household liquid asset growth over the past 14 quarters has been nothing short of amazing – with clear systemic ramifications. Total Deposits inflated $3.797 TN, or 35.8%. Money Market Funds surged $1.215 TN, or 56.5%. Household Treasury holdings rose $520 billion, or 29.7%, and Agency Securities jumped $580 billion, or 74.9%. In total, in only three and a half years, Household holdings of Deposits, Money Market Funds, Treasuries and Agency Securities inflated a staggering $6.112 TN, or 40.3%.
Historic monetary inflation has altered structures. Millions over the long bull market have become impassioned speculators – stocks, ETFs, options and derivatives, crypto - with the financial resources to stay in the game. Households have been granted Trillions of additional liquid assets (tens of Trillions of additional perceived wealth), while the Fed did exactly what it needed to avoid: its words and deeds further solidified the perception that the Fed is backstopping the markets.
June 16 – Reuters (Howard Schneider): “U.S. Federal Reserve officials struck a hawkish tone in their first comments since the central bank held the policy interest rate steady… ‘Core inflation is not coming down like I thought it would,’ Federal Reserve Gov. Christopher Waller said… ‘Inflation is just not moving and that's going to require, probably, some more tightening to try to get that going down.’ In earlier prepared remarks he said that changes in U.S. credit conditions since the failure of Silicon Valley Bank… were ‘in line’ with financial tightening that was already underway due to Federal Reserve interest rate increases -- comments that downplayed the idea a worse-than-anticipated contraction in credit might make further Fed rate increases less necessary. ‘It is still not clear that recent strains in the banking sector materially intensified the tightening of lending conditions’…”
The Financial Sector has been hellbent on breakneck expansion. The Household sector, bolstered by a historic financial windfall, has been keen to spend and speculate. Powerful forces – “inflationary biases” - have thwarted Fed tightening.
But it would be deficient analysis to fixate only on domestic developments. Japan’s Nikkei Equities Index ended the week with a 29.2% y-t-d gain. Major stock indices are up 18% in Germany, 14% in France, 18% in Italy, 17% in South Korea, 22% in Taiwan, and 13% in Mexico. Market liquidity is “fungible” globally – and loose global conditions are surely playing a significant role in bolstering U.S. market liquidity.