was all over the place, though, trading with big swings. These swings seem to be a sign to me of a market that is becoming less liquid. We saw this a lot in 2022, especially as reserve balances held at the Fed fell.start to thin out. While it is not as thin as we saw in 2022, it caught my attention enough that I thought I should point it out now, especially since we know that the Bank Term Fund Program is now unwinding, and reserve balances are likely to head lower from their current levels.
The red and green bars represent the depth of the book, the wider periods represent more depth, and the smaller values show less depth. The light blue line is the S&P 500. The chart clearly shows how the depth of the book gets wider when the index rises and thinner when the index falls. But if it is the case that reserve balances have peaked due to the end of the BTFP and the continued drain from QT, then it would also suggest that leverage should begin to diminish, and the changes we see in the book depth could be a reflection of that.
I don’t have much to add today because, in the end, the CPI report came hotter than expected, and inflation is proving to be much stickier than the market expected. Today, the S&P 500 moved into a more vulnerable spot, and at this point, it will need to break the 5,150 level to open up further downside risk.
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