The spring sell-off in US equities (the S&P 500 and Dow Industrials peaked in early April and early May respectively) followed a fall in US bank reserves from a peak in mid-February – see chart. Reserves have led stock market turning points on several previous occasions in recent years, consistent with changes in Fed liquidity policy being an important influence on investor behaviour, a relationship termed “the Bernanke market” by Andy Kessler – see previous post.
From a low in early May, however, reserves have climbed for six consecutive weeks, with the latest increase the largest of the series. Has the Fed been injecting liquidity in response to Eurozone-related financial stress and weak economic news even before it considers formal policy easing at the Open Market Committee meeting scheduled for 19-20 June?
The reserves increase is the counterpart of a fall in the balance in the US Treasury’s account at the Fed, which could reflect funds being shifted into private banks or else a slowdown in market borrowing designed to leave more liquidity in investor hands.
US economic news is likely to remain soft – six-month real narrow money growth slowed further last month – but the Fed’s change of tack may offer near-term support to stocks.