Report Industry Investment Rating - Not provided in the content Core Viewpoints - Despite the recent Fed rate cut, the US dollar liquidity has tightened instead of loosening, leading to price fluctuations in various assets and significant declines in risk assets [1][2] - The current tightening of US dollar liquidity is mainly caused by the depletion of ONRRP and the accumulation of funds in the TGA account due to the US government shutdown [3] - Whether this liquidity crunch will persist depends on when the US government shutdown ends and the Fed's subsequent operations. If the two parties reach an agreement and the government re - opens, or the Fed injects liquidity, the market may return to normal [4] Summary by Related Content Liquidity Tightening Indicators - **Volume Indicators**: At the end of October, the New York Fed's repurchase volume approached $50 billion, and in early November, the daily average repurchase volume remained at a high level of nearly $15 billion, indicating a normal and continuous liquidity crunch [1][7] - **Price Indicators**: On October 31, the US secured overnight financing rate (SOFR) climbed to 4.22%. Although it dropped to 4.13% on November 4, it was still much higher than the Fed's 3.9% excess reserve rate, with a spread of 23bp, the highest since July 29, 2021 [1][10] Impact on Asset Prices - **US Dollar**: The US dollar index rose from 99.15 on October 29 to 100.21 on November 4 [2][14] - **US Stocks**: The S&P 500 index fell from 6891 points on October 29 to 6772 points on November 4, a cumulative decline of 1.7% [2][14] Causes of Liquidity Tightening - **ONRRP Depletion**: ONRRP has dropped to a historical low, with an average daily volume of $11.8 billion since October. As the "US dollar reservoir", its exhaustion means that each financing of the fiscal TGA account consumes bank reserves, intensifying the liquidity crunch [3][16] - **US Government Shutdown**: During the shutdown, the TGA account balance increased from $758 billion before the shutdown in September to nearly $1 trillion in October, the highest since May 2021, exacerbating the "pumping effect" on the financial market [3][16] Historical Cases of TGA Account Balance Increase - **2020**: Due to the public health event, the TGA account balance increased from $0.38 trillion at the end of March to $1.79 trillion at the end of July, leading to a liquidity crunch. But the market liquidity expanded with the Fed's injection, and the stock market recovered after an initial slump [3][19] - **2022**: After the US Congress approved raising the debt ceiling at the end of 2021, the increase in Treasury bond issuance in 2022 led to a decline in US stocks from the end of March and a strengthening of the US dollar, but the impact only lasted until May [3][19] - **2023**: After the suspension of the debt ceiling in mid - 2023, the Treasury's large - scale bond issuance to rebuild the TGA cash buffer led to a decline in US stocks and a strengthening of the US dollar. The impact weakened after the TGA account balance started to decline in October [3][19] Future Outlook - The persistence of the current liquidity crunch depends on the end of the US government shutdown and the Fed's subsequent operations. If the government re - opens or the Fed injects liquidity, the market may return to the previous trend [4][23]

Group 1 - The U.S. banking system's reserves have decreased significantly for the seventh consecutive week, falling below $3 trillion, which is a critical factor for the Federal Reserve's decision on reducing its balance sheet [1][3] - As of the week ending September 24, bank reserves dropped by approximately $21 billion to $2.9997 trillion, marking the lowest level since the week of January 1 [1][3] - The decline in reserves coincides with the U.S. Treasury increasing bond issuance to rebuild cash balances after raising the debt ceiling in July, which has drained liquidity from the Federal Reserve's balance sheet [3] Group 2 - The reduction in reserves is exacerbated by the near depletion of overnight reverse repurchase agreements (RRP), leading to a continuous decline in bank reserves held at the Federal Reserve [3] - The Federal Reserve's ongoing balance sheet reduction (quantitative tightening, QT) is affecting daily operations in the financial system, with potential liquidity constraints that could lead to market volatility [3] - The effective federal funds rate has slightly increased to 4.09%, indicating a tightening financial environment, which is a significant change after two years of hovering near the lower end of the target range [3][4] Group 3 - Senior economist Lou Crandall noted that the reduction in excess funds available for non-U.S. institutions has led to a contraction in the trading volume behind the federal funds rate [4] - Dallas Fed President Lorie Logan suggested that the Federal Reserve should abandon the federal funds rate as a benchmark for monetary policy and consider using overnight rates linked to a more robust U.S. Treasury collateralized loan market [4] - Logan emphasized that the federal funds rate target has become outdated, and the connection between the rarely used interbank market and the overnight money market is weak and could suddenly break [4]

Core Insights - The U.S. financial system is experiencing a significant liquidity contraction, influenced by Treasury auction settlements and corporate quarterly tax payments [1] - The secured overnight financing rate (SOFR) has risen to 4.51% as of September 15, marking a notable increase from 4.42% the previous trading day, and the largest single-day rise since December 31 [1] - The spread between SOFR and the effective federal funds rate has widened to 18 basis points, the highest level since December 26, as market expectations suggest a potential 25 basis point cut by policymakers [1] Group 1 - The increase in SOFR is attributed to a combination of the U.S. Treasury rebuilding cash reserves and the Federal Reserve's ongoing balance sheet reduction [1] - The usage of a Federal Reserve overnight lending tool, often seen as an indicator of excess liquidity in the financing market, has dropped to a four-year low [1]