Dear all,
With the market continuing its upward trajectory in October, is there reason to worry? In this month’s report, we assess the outlook for the coming quarter by examining both liquidity conditions and fundamental drivers.
I. Liquidity: The Fed Cuts Rates Again & Announces QT Pause
The Federal Reserve meeting on October 29th delivered another 25 basis point rate cut and formally announced the pause on balance sheet reduction—fully in line with our expectations. This also echoes our previous observations: reserves in the US financial system have dipped below the $3 trillion threshold, with the ratio to total assets briefly sliding to 12%, drawing growing attention to liquidity strains. The Fed's announcement of pausing balance sheet reduction could not have been more timely—pausing QT before the market reached a critical point—providing a timely boost of confidence, stabilizing liquidity and easing fears of a funding shortfall.
As for Powell's hint during the meeting that "a December rate cut is not guaranteed," sparking widespread market debate, we see nothing amiss with this approach and outline three key reasons as follows: 1) The primary goal is to temper the market's overly optimistic expectations, rather than signaling an end to rate cuts. 2) It communicates that the economy, as observed by the Fed, remains resilient and far from spiraling out of control. 3) Should genuine liquidity concerns emerge, the Fed has shown it will act decisively—as demonstrated by the current QT pause.
In short, the Fed’s actions were deliberate and constructive for market stability. Moreover, looking ahead, we expect additional liquidity relief once the US government resumes operations and Congress approves new funding, potentially as early November. Taken together—rate cuts, halted QT, and fiscal resolution—monetary conditions should remain accommodative from Q4 2025 through Q1 2026.
II. Fundamentals: AI Boom Delays Manufacturing Downturn to Mid-2026
With liquidity no longer a near-term concern, what about the fundamentals?
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