Global Liquidity Updates

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.

The Federal Reserve's tightening pace has slowed for the third consecutive week, yet net liquidity's rate of change remains negative.

Key question floating in investors' minds: is easing finally on the horizon?

In the meantime the TGA spenddown continues and so does the RRP decline, which showcases a clear downtrend.

At the same time, lower level of MOVE Index leads to an improved collateral multiplier.

Despite widespread skepticism around Bitcoin's recent rally, much of the disbelief stems from a focus on the traditional M2 money supply, which has been in decline.Ironically, this skepticism may actually be bullish for Bitcoin.

While M2 offers a basic liquidity measure, we prioritize tracking Global Liquidity.

Notably, Bitcoin has closely followed our Global Liquidity Index’s movements.

However, speculative forces can often override fundamentals, which is why a disciplined system is essential - nothing is ever certain in markets.

In the East, China kicked off Monday with a big 706 billion yuan net injection via the 7-day RRP, marking the largest since mid-November.

With plans for proactive fiscal policies next year and a moderately loose monetary policy, China seems poised for a great start in '25.

Pair that with a potential spenddown of the current ~700 billion TGA level, Q1 could end up surprising many in a positive way.

However, given their focus on maintaining a stable USD exchange rate, any major moves may require the US to act first.

Closer to home, the FED is widely expected to cut rates this week again, alongside other global central banks making similar moves.
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The overall global trend is clear: pivot towards easing.Data-wise, our Global Liquidity has decreased by 1.713 trillion, marking a decline of -1.29% this week.

Despite this, the 3-month Rate of Change remains above the 12-month, signaling continued positive liquidity momentum.

Global Liquidity on the Rise

‍Today, China made headlines by announcing looser monetary conditions.

Given the ongoing deflationary pressures weighing down its economy, this move isn’t really a big surprise.

While many are reacting with "Finally, China is making a move," the reality is that China has already been injecting liquidity for some time before this announcement was made.

The key takeaway here is that this policy shift could open the door for larger liquidity injections in the near future.

For comparison, the last time China adopted a 'moderately loose' monetary policy was during the aftermath of the global financial crisis in 2008 - a point worth keeping in mind.

We're expecting China to take big actions now that this announcement has been released.

Meanwhile the MOVE Index has corrected downward, improving collateral multiplier and subsequently boosting global liquidity.

Shifting focus to the West, the Federal Reserve’s bank credit has shown a notable increase in its RoC over the past three weeks.

This suggests that the Fed has been tightening far less aggressively compared to earlier periods.

Data-wise, our GLI has risen by +$1.946 trillion, reflecting a 1.49% increase.Interestingly enough, the 3M RoC has rebounded before touching the 12M RoC-a promising signal of sustained positive liquidity momentum.

Looks like we’ll even get early Christmas gifts from the markets again