US Economic Indicators Signal Trouble as Market Reacts to Fed's QE Hint
The ISM Manufacturing sector experienced prolonged contraction for 15 consecutive months, while Construction spending unexpectedly dropped for the first time since December 2022. Additionally, UMich confidence declined, and there was a slight increase in inflation expectations, collectively impacting the US Macro surprise index. Despite these negative indicators, the market responded positively to remarks by Waller, who hinted at the Fed's potential introduction of a new QE strategy involving a 'Reverse Twist'. This strategy would involve buying short-term Treasuries and selling Agency MBS. Waller's comments coincided with the Treasury's plans to increase the issuance of bills, aligning with the Fed's potential actions. Furthermore, the Fed's reverse repo facility experienced a significant decrease in liquidity, hinting at potential liquidity issues. As a result, there was a surge in various assets, including stocks, gold, Treasury yields, oil, and cryptocurrencies. Despite the market rally, there are concerns about the sustainability of this upward trend, with some indicators suggesting potential market overheating.
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