🧵Notes On The Liquidity Picture
1/ Liquidity is a vast concept that spans the balance sheet capacity across the economy. In this thread, we take a look through those that are particularly relevant to the financial system and markets.
1/ Liquidity is a vast concept that spans the balance sheet capacity across the economy. In this thread, we take a look through those that are particularly relevant to the financial system and markets.
2/ Over the last quarter, liquidity conditions improved in markets, driven by a rise in money market fund inflows, an increase in Fed loans, and a weak commercial paper issuance. The combination of these measures gives us a sense of the short-term repositories of liquidity
3/ Starting with money market funds, we have seen significant inflows over the last quarter. While some of these are indeed a function of baking system stress and a reach for yield, it is also worth recognizing that these inflows are...........
4/ ..dominantly driven by money coming from the economy via business profits and household savings. Therefore, sustained inflows here a contingent on continued nominal growth. Given the profits picture + declining nominal spending, its hard to see sustained increases:
5/ Next, the Fed saw an increase in reserve balances. This was driven by emergency loans, TGA spend, and RRP reductions. Below, we show B/S to GDP, QoQ changes in assets, liabilities, and how those impacted reserves:
6/ Finally, we look to commercial paper. Much like money markets, this segment of short-term funding markets is pro-cyclical but has further sensitivity to financial conditions, given the skew in issuance to financial firms. Contracting:
7/ Putting these together, the liquidity picture has looked & felt better in markets. However, looking through the drivers, it is unlikely these tailwinds persist. Further, the more money market inflows rise, the more likely it is the Fed will have to lean on liquidity further.
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