Liquidity turning point: the market's true turning signal

Recently, has anyone felt that the momentum of the US stock market is a bit off? Gold and silver have also started to fluctuate violently. Many people attribute the reason to China-US relations, which is certainly one of the factors, but what I am more concerned about is a more core issue, Liquidity.

Although the China-U.S. relations seem to have eased this week and the market appears optimistic again, don't be fooled by appearances; the "blood circulation" of funds has not actually recovered. Last Friday, I noticed a detail: the banking system is rushing to use the Standing Repo Facility (BRF). Generally, banks only use this tool when funds are tight, which already indicates that the problem is significant.

At the same time, the overnight repo rate is rising, and the cost of borrowing between banks is becoming more expensive, indicating that short-term funds are starting to tighten. More notably, the reserves of the banking system have declined for two consecutive weeks, falling back below $3 trillion. This figure is actually very critical; once it drops below this level, the market often signals increased volatility.

In addition, the reverse repurchase agreements (RRP) that have served as a "funding cushion" for the past four years have almost been depleted, and the balance is now close to zero, meaning that the safety net that could temporarily support market liquidity is also gone.

These signs put together convey a clear message: the liquidity of the US dollar is deteriorating.

And now, the meeting has ended and the results are out. The Fed has 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 has also been lowered to 3.90%.

However, there is a key point here: Although interest rates have been cut, Jerome Powell clearly stated that "a further rate cut in December is not a foregone conclusion, far from it." In other words, the policy direction has loosened somewhat, but it has not completely shifted to "immediate and comprehensive easing."

If I guessed correctly, it means that the real liquidity reversal point may have arrived. Interest rates are falling, liquidity expectations are improving, but the central bank has not made a commitment to "immediately unleash massive liquidity" for the next step, indicating that they are waiting for the next signal.

Next, what is worth paying attention to includes:

Have the indicators such as bank reserves, repo rates, and RRP balances begun to stabilize or even rebound; has market funding started to shift from expectations of "liquidity tightening" to expectations of "liquidity improvement"; and have risk assets (such as the stock market, precious metals, and the crypto market) begun to react in advance to this turning point.

I'm not sure if this is the beginning of a reversal, but sometimes, it feels like knowing the answer comes earlier than the data.