All the important stuff including consumer comments from Pepsi and LVMH

After PPI at 8:30am, the 10 yr note auction will be in focus after the soft 3 yr auction yesterday where short term paper should be much easier to sell than the longer term stuff but not yesterday. The yield on the 3 yr was sold almost 2 bps above the when issued price. Also, the bid to cover of 2.56 was below the one yr average of 2.70 and dealers were stuck with 22% of the supply, the most since October 2022. 

As one of a few factors, I do pin some of the rise in long term rates since late July when the BoJ announced the widening to yield curve control (which I think was the main reason), to QT, not just in the US but elsewhere. Yes, when we saw QE1 and QE2 rates rose too but that was a reflation trade and with different circumstances. The big question is how long can QT continue on before the financial plumbing starts to clog up. What level of bank reserves is the 'right' level? Some argue $2.5 trillion vs the $3.15 trillion now. How much more will their RRP facility shrink? We'll see and Roberto Perli, who basically runs the Fed's System Open Market Account that trades the Fed's balance sheet, said Monday "Recently, our implementation framework has confronted a number of stress tests and performed quite well. This is all encouraging, but we remain cognizant of the risks and uncertainties ahead." 

As we've seen QT only once before and it ended in failure, there is not like there is a wide body of historical experience here but I will bet this one ends in failure too. I define failure as things cracking in the financial system well before the Fed's balance shrinks by much and we're left with this perpetually large Fed presence in the markets. And, let's take this one step further, the Fed might be forced to revert back to QE just to help absorb the massive amount of Treasury supply coming down the DC pike. For perspective, the Fed's balance sheet in February 2020 was at $4.16 trillion vs just under $8 trillion today. If the balance sheet since February 2020 just grew in line with nominal GDP (obviously goosed by the inflation and fiscal largesse since), it would stand instead today at $5.19 trillion. I see no chance it gets anywhere close to that during this QT process.