Global Liquidity Updates
AE Liquidity Oscillator Signals Weakness, but Potential Relief Ahead
The AE Liquidity Oscillator has shown its third red signal in a row, with the fourth coming as well.
Q4 2024 wasn't so great for global liquidity, so it's not as surprising.
Drop that occurred in Fed liquidity has almost reversed completely, and it was mainly because financial institutions have put more money into the Reverse Repo (RRP).
They did this at the end of the year to clean up their balance sheets and meet regulations, as they usually do.
On the bright side, debt ceiling talks haven't been settled yet.
This could lead to the government starting to use the Treasury General Account (TGA) funds, which currently stand at $721 billion.
Global Liquidity in Focus: Challenges and Policy Shifts for 2025
China's Liquidity Moves:
The People's Bank of China (PBoC) injected RMB 580.2 billion last week via reverse repo operations at a fixed rate of 1.50%.
While this provides short-term relief, it follows aggressive prior liquidity drains.
With global liquidity deteriorating and the Chinese economy under pressure, these actions hint at potential stronger measures in 2025, especially if the DXY weakens and the FED eases policies.
US Liquidity Moves:
The Treasury General Account (TGA) declined by $104.165 billion last week.
As EOY financial conditions tighten, due to institutional balance sheet adjustments, this TGA drawdown offers short-term relief to funding markets.
However, with QT and elevated SOFR rates still exerting pressure, the broader liquidity environment remains tight, making sustained TGA drawdowns critical for any meaningful liquidity improvement in early 2025.
As highlighted in our recent post, it is necessary for the FED to start QE measures to address the debt problem in the US.
DXY and Yields:
The DXY reached a 2-year high as demand for the USD surges amid tariff speculations.
Meanwhile, bond yields continue rising despite rate cuts since September, signaling inflationary concerns for 2025.
Both trends pose significant challenges to global liquidity conditions.
Global Liquidity Trends:
Our Global Liquidity Index declined by $0.52t, a -0.4% drop this week.
Liquidity momentum remains weak, with the 3-month rate of change still below the 12-month rate of change.
Overall, the 2025 presents formidable challenges for global liquidity.
Significant policy shifts, particularly QE from the FED, may be needed to address rising debt and stabilize liquidity conditions.
Debt-to-Liquidity Imbalance: Policy Shifts Needed for Sustained Market Growth
The US Debt/Liquidity ratio provides valuable insights into how liquidity sustains market performance.
Our charts clearly illustrate a relationship:
High debt relative to liquidity often coincides with market struggles.
Low debt relative to liquidity typically supports strong risk market performance.
Currently, the ratio is at elevated levels.
While risk markets might rise on investor sentiment, we think a sustained rally likely requires a major policy shift—ending QT and initiating QE.
Rising debt is worsened by structural challenges like an aging population, Social Security, Medicare, and increased welfare costs.
These underscore the importance of monetary and fiscal policy in ensuring market stability.
We analyzed NVIDIA (longer historical data) and Bitcoin, as they often respond quickest to liquidity changes, offering a clear lens into these dynamics.
