Has anyone recently felt that the momentum of the U.S. stock market is a bit off? Gold and silver have also started to fluctuate violently. Many attribute the reasons to the China-U.S. relationship, which is certainly one of the factors, but I am more concerned about a more core issue: liquidity.
Although the China-U.S. relationship seems to have eased this week and the market appears optimistic again, don't be fooled by appearances; the 'blood circulation' of capital has not actually resumed. Last Friday, I noticed a detail: the banking system is eager to use the Standing Repo Facility (BRF). Normally, banks only use this tool when funds are tight, which indicates a significant problem.
Meanwhile, overnight mortgage repo rates are rising, and the cost of borrowing between banks is increasing, indicating that short-term funding is starting to tighten. More notably, bank reserves have declined for two consecutive weeks, falling back below $30 trillion. This number is actually very critical; once it drops below this level, the market often shows signs of increased volatility.
Moreover, with the reverse repos (RRP) that served as a 'funding cushion' over the past four years being nearly depleted, the balance is now close to zero, meaning that the safety net that could temporarily support market liquidity is gone.
These signs put together convey a clear message: U.S. dollar liquidity is deteriorating.
And now, the meeting has concluded, and the results are out. The Fed lowered the target range for the federal funds rate by 0.25 percentage points to 3.75%-4.00%. At the same time, the interest on reserve balances was also lowered to 3.90%.
However, there is a key point here: although interest rates have been cut, Jerome Powell has clearly stated that 'a rate cut in December is by no means a certainty, far from it.' This means that while the policy direction has loosened, it has not completely turned towards 'immediate full easing.'
If I am correct, this means that our true liquidity reversal point may have already arrived. Interest rates are falling, liquidity expectations are improving, but the central bank has not made a commitment to 'immediately inject a large amount of liquidity,' indicating they are waiting for the next signal.
Next, areas worth paying attention to include:
Are indicators such as bank reserves, repo rates, and RRP balances starting to stabilize or even rebound; is market liquidity shifting from expectations of 'liquidity tightening' to expectations of 'liquidity improvement'; are risk assets (such as stocks, precious metals, and the crypto market) beginning to react ahead of this turning point?
I'm not sure if this is the beginning of a reversal, but sometimes, the feeling comes before the data.
