
Perhaps the biggest is which yields are moving. 2022 was especially painful because the risk-free rate or peak in expected Fed Funds Futures rose. In fact, up until recently, the equity market, as measured by the S&P 500, moved in the opposite direction of expected peak Fed Funds expectations. When peak Fed Funds expectations rose, the equity market fell and vice versa. Or, at the very least, the market would only move higher when peak rate expectations were stable. But since the S&P 500 peaked in early August, the weakness has not been associated with higher expectations of the peak Fed Funds rate, which has remained relatively stable at 5.45%.


There’s no denying the economic data has remained resilient or even better than consensus expectations in North America. Add to this some rekindling of inflation fears as some of the base effects that were helping inflation grind lower start to reverse. Maybe, but the data has been on the better side of consensus for a number of months. We continue to remain in the camp that slowing growth is coming as more of the savings buffer built up over the past few years is ground lower by inflation and higher credit costs. The number of cracks continues to grow, but truthfully, we did think they would have shown up sooner.
There is another factor that likely contributed to the recent up-move in yields, which has not been given much attention lately – good ol’ QT. Quantitative stimulus, or the removal of stimulus, has had a pretty big impact on equity and bond markets over the past decade. Now, the Fed has been slowly shrinking their accumulated balance sheet holdings. But there are other components of stimulus that have been more volatile, sloshing money around in the financial system. And those other categories have seen some big moves in September.
The General Account, akin to the government chequing account, had been filling up after the previous debt ceiling drama. Filling up is removing stimulus from the markets, and it accelerated in the past week. Maybe due to renewed shenanigans around the debt ceiling and with quarterly corporate tax receipts incoming. Nonetheless, this is less stimulus. Much of the general account replenishment had been offset by a reduction in the REPO market holdings [call us if you want more details]. For much of the past few months, this neutralized the impact of the rising General Account, but recently, the increase in the general account has been much, much larger than the reduction in REPO. Net result: less stimulus.
Another factor has been the Bank Term Funding Program and Other Credit Extensions. These were the Fed accounts that regional banks tapped when they were under pressure due to deposit outflows. Remember that scare back in March? This tapping was a stimulus, and it ballooned quickly but recently has started to come down quickly. Hence the removal of stimulus.

Final Thoughts
— Craig Basinger is the Chief Market Strategist at Purpose Investments — Special contribution from Michael Allen at Purpose Investments
Source: Charts are sourced to Bloomberg L.P. and Purpose Investments Inc.
The contents of this publication were researched, written and produced by Purpose Investments Inc. and are used by Echelon Wealth Partners Inc. for information purposes only.
This report is authored by Craig Basinger, Chief Market Strategist, Purpose Investments Inc.
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