Dear Investor

General Market Overview

Markets often react to the cycle of economic news releases; however, many United States (US) releases have been delayed this quarter, and some data series will have permanent gaps. The US Government shut down from the 1^st of October to the 12^th of November (the longest in history), with the core dispute over 2026 spending priorities, primarily around healthcare. Under the Antideficiency Act, federal agencies cannot spend money or perform non-essential work without congressional appropriations. Most statistical work is considered “non-excepted” (i.e., not related to immediate life, safety, or property protection), so employees were furloughed, and operations halted. As the shutdown lasted 43 days, it crossed multiple monthly reference periods, creating irreversible gaps.

No price data was collected for October Consumer Price Index (CPI) or Producer Price Index (PPI), and those data points are now permanently lost. Inflation measures are key metrics in Federal Reserve (Fed) decision-making, and Fed Chair Jerome Powell has repeatedly noted that the data vacuum complicates Fed actions. The Federal Open Market Committee (FOMC) chose to cut interest rates by 25 basis points (bps) at the end of the October meeting. However, the meeting minutes showed a strongly differing view among the Fed officials, with many voicing concerns over inflation, thereby significantly diminishing the market’s expectation of an additional rate cut this year.

The other key announcement by the Fed was the end of Quantitative Tightening (QT). During the QT phase, which began in June 2022, the Fed deliberately reduced its balance sheet by not fully replacing maturing securities. 

The financial mechanics between the Fed, the US Treasury Department, and the commercial sector can be quite non-intuitive, particularly when viewed from a traditional accounting perspective. The US Treasury holds an account at the Fed known as the US Government Treasury General Account (TGA), a government checking account at the central bank.

The Fed holds US Treasury securities (bonds, notes, etc.) on its balance sheet as assets. Typically, when one matures, the US Treasury Department repays the principal (the original loan amount) to the Fed. This payment comes from the Treasury’s cash balance held at the Fed in the TGA. During QT, instead of using the received principal to buy new Treasury securities (which would keep the balance sheet size stable), the Fed allowed it to “roll off.” A roll-off means the maturing principal is not replaced with new assets. 

From a balance sheet accounting perspective, when Treasuries roll off, Fed assets are reduced by the principal amount. On the liabilities side, to balance the asset reduction, the Fed reduces its liabilities, specifically, bank reserves (the deposits commercial banks hold at the Fed). This somewhat unintuitive transaction is where the “cash” effectively disappears: It’s not sent to a vault or invested elsewhere; it’s extinguished as a reduction in the money supply.

In accounting terms, the principal payment credits the Fed’s asset account but debits the reserve liabilities, netting out to a smaller balance sheet. The non-reinvested cash is effectively removed from circulation through a reduction in bank reserves, tightening financial conditions.

Fed assets have now returned to 2013 levels as a share of Gross Domestic Product (GDP), the lowest among major central banks and a remarkable normalisation from the 36% peak in 2022. 

The run-off of securities and the end of QT take effect on the 1^st of December, at which point the Fed will fully reinvest maturing Treasury securities, likely stabilising the balance sheet. The end of QT removes an approximately $40–50 billion/month headwind to system liquidity (pre-taper levels), which is modestly supportive for risk assets, though not equivalent to resuming Quantitative Easing (QE).

While the FOMC has delivered 150 bps of cuts in just three meetings, bringing the policy rate from its 23-year high to 4.00–4.25% by December, the Effective Federal Funds Rate (EFFR) has traded remarkably closely to the upper bound of the FOMC target range throughout 2025. 

The EFFR is the actual interest rate at which overnight unsecured loans of reserve balances (federal funds) are transacted between depository institutions (banks, credit unions, etc.) and certain other entities, primarily government-sponsored enterprises like Federal Home Loan Banks. The EFFR is not set directly by the Fed but instead emerges from real market transactions in the federal funds market. The FOMC only sets a target range. 

The fact that the EFFR has tracked the FOMC target rate over 2025 reflects the scarcity of excess reserves in the system as QT drained the final layers of liquidity.

However, into 2026, the removal of the two most significant monetary headwinds of the past three years, US QT and the Bank of Japan’s ultra-hawkish yield curve control, creates a markedly more supportive global liquidity backdrop than at any point since 2021. The Fed’s balance sheet is now set to stabilise or grow gently for the first time since March 2022, while Prime Minister Takaichi’s administration has explicitly committed to ¥40–50 trillion of cumulative fiscal stimulus over the next three years. 

General Conclusion

The European Central Bank (ECB) and Bank of England (BoE) are both now deep into their own easing cycles (ECB deposit rate expected to reach 2.00–2.25% by mid-2026, BoE base rate around 3.75–4.00%), while the Fed is likely to cut rates further in 2026. These central bank actions mean that, absent a genuine reacceleration in inflation, the global economic backdrop is expected to be stable. 

A stabilising global economy does not guarantee stock market performance; many political and economic risks remain. And so, while global liquidity (a key driver of market expectations and performance) is undoubtedly increasing, some caution is warranted as we transition from coordinated monetary tightening to a looser policy environment.