Weekly Forecasts 26/2025

Fed market bailout and global liquidity forecasts

1. The Fed rode to the rescue of the markets in March.

2. Impulse-response analysis on the dynamics behind the money supply (global liquidity).

3. Forecasts for global liquidity over the next nine months.

This week we update our forecasts concerning global liquidity. First, we show in a free-to-read entry that the Federal Reserve bailed out the markets in March. I would not consider this to be a big surprise. It just rather depressingly shows that there really are no “markets” anymore.

We have not run an in-depth statistical analysis on the dynamics of liquidity flows between countries before, and we now set to fix this caveat with impulse-response analyses. We observe that China and the U.S. are driving the liquidity impulse between themselves and the euro area, Japan, and the U.K. This is no surprise considering the major liquidity impulses (and withdrawals) from China and the U.S. holding the reserve currency.

Forecasts imply that the strong seasonality, driven by China, in the global liquidity flows would continue. This makes it possible to be wary of the months when liquidity is expected to retreat and ‘bullish-oriented’ during the months when strong liquidity injections are expected. Yet, like we have seen, politics and geopolitics are the main market drivers in the current era.

I also urge you to take advantage of our summer campaign, offering our annual subscription with 25% off (corrected after publication). The offer runs until July 7, and you can claim it by subscribing below. Please also note that we will not be publishing the Weekly Forecasts between 7 and 21 July.

Tuomas

The way to save the markets from a tariff-tantrum

Our primary focus is on two aspects of the new global liquidity data.

1. Did the seasonality of liquidity injections from China continue in the spring, and

2. How did the U.S. money supply (the Fed) respond to the tariff panic?

Here are the answers.

Monthly changes in money supply from China, the euro area, Japan, the U.K., and the U.S. in billions of USD. Source: GnS Economics, TheGlobalEconomy.com

The answer to the first question is a resounding yes. Money flows from China continued to fluctuate in a typical seasonal manner during the first four months of the year, with the smallish exception that April saw only a minor money (liquidity) withdrawal. Otherwise, the monthly changes in money supply from China followed their historical pattern rather slavishly.

Money flows from the U.S., on the other hand, increased notably in March. On March 4, the administration of President Trump enacted 25% tariffs on goods imported from Canada and Mexico, which were announced in early February (followed by a pause). Numerous tariff announcements followed throughout the month, to which asset markets reacted by drifting downwards. The Federal Reserve injected over $300 billion into the economy and markets. We assume that such a spike in liquidity injections cannot come from anywhere else, like from banks, in such an uncertain environment. This pushed markets higher before the mini-crash at the beginning of April. Current data from the U.S. does not, unfortunately, reach April yet, but China’s liquidity withdrawal in April definitely played a role in the market rout.

Clearly, however, the Federal Reserve ‘blinked’ when markets started to head down. Such behavior has already become customary, and we can effectively forget all talk of free and “efficient” markets. They are monitored and guided by major central banks. March was yet another case example of this.

Impulse-response analysis of liquidity flows

We are yet to run impulse-response analysis on the money supply data. We will conduct it now to gain more insight into the dynamic interlinkages between the money flows from different countries.