Fragile Liquidity Meets Optimism: Navigating Q1 2025 Challenges and Opportunities

Liquidity Weakens, but Optimism Remains for Q1 2025

Today, the AE Liquidity Oscillator has touched -1.58, indicating that global liquidity conditions have turned increasingly fragile.

This reading reflects the strengthening macro headwinds and an overall cautious attitude toward risk assets.

Adding to the pressure, the recent 25 bps FOMC rate cut, though anticipated, came with a more hawkish outlook for 2025.

The Federal Reserve has raised inflation forecasts and signaled fewer rate cuts next year, dampening hopes for sharper monetary easing.

This development has weighed heavily on markets, with major indices showing significant declines.

The combination of tighter liquidity and the prospect of restrictive policy for an extended period could heighten challenges for risk-on assets in the months ahead, reinforcing the caution highlighted by today’s oscillator reading.

However, we maintain a positive outlook for Q1 2025 despite current poor liquidity conditions and the Fed’s hawkish stance.

As the new year approaches, risk-on assets could benefit from seasonal strength and potential improvements in liquidity dynamics, making close monitoring of these developments crucial.