New all-time high in global financial liquidity1) The Fed has unveiled its new monetary policy trajectory, here are the key takeaways:
- Federal funds rate cycle through the end of 2025: there should be a total of 3 rate cuts by year-end.
- Update of macroeconomic projections: The Fed acknowledges the slowdown in the labor market and still expects inflation to normalize during 2026, allowing time to absorb the impact of tariffs.
- Balance of power among the 12 voting FOMC members: 11 out of 12 voted for a 0.25% rate cut, with only Stephen Miran voting for a jumbo Fed cut.
In the end, Jerome Powell’s Fed has thus enacted a genuine monetary pivot to account for the labor market slowdown, while remaining cautious about the upcoming normalization of inflation. The more accommodative monetary trajectory announced should provide support for risk assets in the stock market, but upcoming U.S. employment and inflation updates will still have a strong impact.
2) Global liquidity hits a new all-time high, a supportive factor for risk assets
Correlation studies show that risk assets in the stock market are highly correlated with the trend in global liquidity, i.e., the sum of the money supplies of the world’s major economies. Simply put, when the underlying trend of global liquidity is bullish, the S&P 500 and bitcoin prices also follow a bullish trend, and vice versa.
There are several ways to represent a country’s money supply, and the M2 monetary aggregate is recognized as the best measure of available liquidity within a state. Global M2 liquidity is calculated by aggregating the money supplies of major economies, notably the United States and China, converted into U.S. dollars (USD). The dollar’s evolution directly influences this measure: a strong dollar reduces global M2 in USD terms, while a weak dollar increases it, affecting capital flows and global financial conditions.
While global M2 liquidity is decisive, the net credit capacity within the financial system also plays a major role. When this is added to global M2, you get global liquidity — and this has just reached a new all-time high, as shown in the chart attached to this article.
This should therefore be a supportive factor for the stock market through year-end.
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