What a July we’ve had. The G3 central banks have now received plenty of labor market data that justifies cutting rates fairly aggressively. In our opinion, this is a tricky trend to resist, even if market pricing does admittedly seem aggressive.

Before shifting our focus to forward rate pricing, let’s examine liquidity, as both growth and inflation appear to be losing momentum (as reflected in our nowcasts as well).

The USD liquidity outlook has two major phases remaining this year. First, we expect roughly a $180 billion increase in September due to strong tax seasonality in the Treasury General Account (TGA). After that, we’ll see the Q4 depletion of the TGA in response to the upcoming debt ceiling deadline in early 2025, which will likely bring the TGA close to empty levels.

We should anticipate liquidity dropping below pain thresholds in September, which could cause SOFR-Fed Funds spreads to spike, risk assets to suffer, and commodities to trade on the heavy side. This is why we remain cautious on the outlook, despite the rebound we partially participated in earlier this month.

Chart 1a: The TGA will move up before down

Chart 1b: Liquidity is likely to drop below pain threshold before rebounding in Q4