Liquidity normalizes after brief disruption
The United States Dollar (USD) recovered part of its previous day’s losses as equity markets stabilized following Thursday’s sell-off. According to BBH FX analysts, the USD may struggle to gain further upside momentum, as it currently trades above levels implied by US-G6 2-year bond yield spreads.
The next key data release is the November University of Michigan sentiment index (3:00pm London, 10:00am New York), expected at 53.0 versus 53.6 in October—well below the long-term average of 84.4. Analysts suggest watching inflation expectations closely to confirm whether price pressures remain contained.
One hour later, the New York Fed will publish its survey of consumer expectations. Analysts are watching for any increase in the perceived probability of job loss over the next twelve months, as recent data points to a rising unemployment rate.
Liquidity conditions in the United States have normalized after a brief disruption late last month. The spread between the tri-party general collateral rate (TGCR) and the interest rate on reserve balances (IORB) has narrowed to nearly 0bps, after spiking to +25bps on October 31. Under normal conditions, TGCR typically aligns closely with or slightly below IORB.
Recent upward pressure on funding rates reflects temporary factors, including fiscal flows and the US Treasury’s growing cash balance at the New York Fed due to the government shutdown. Jorge Aseff, Portfolio Manager for Inflation-Indexed Fixed Income, notes that while brief spikes in funding markets may occur, the situation is not alarming. The Federal Reserve is expected to end its balance sheet reduction on December 1, ensuring ample reserves. Additionally, tools like the discount window and Standing Repo Facility are in place to cap money market rates and provide liquidity if needed.
A growing number of Federal Reserve officials voiced support for holding off on rate cuts. St. Louis Fed President Alberto Musalem and Cleveland Fed President Beth Hammack emphasized the need to counter above-target inflation. Meanwhile, Chicago Fed President Austan Goolsbee urged caution and a slower pace of easing, especially given the lack of inflation data during the government shutdown.
Today, Federal Reserve Vice Chair Philip Jefferson will speak on artificial intelligence and the economy (12:00pm London, 7:00am New York), while Fed Governor Stephen Miran will address stablecoins and monetary policy (8:00pm London, 3:00pm New York).