Federal Reserve balance sheet

The Federal Reserve's balance sheet shrank by $18.591 billion this week, currently standing at $6.905 trillion, marking the smallest contraction in nearly four weeks.

This week, the Fed did not reduce its holdings of U.S. Treasuries, only selling $13.297 billion in MBS. However, SOFR remains abnormal, with the 99TH exceeding the upper limit of the interest rate corridor. Taking all factors into account, the Fed still faces difficulties in balance sheet reduction. Additionally, Bank Reserves remain above $3.2 trillion. If interest rates are cut in December and Bank Reserves fail to shrink further, there is reason to believe the Fed may halt balance sheet reduction by the end of Q1 2025 at the earliest.

Next week's labor data is approaching, with market expectations slightly optimistic. NFP is projected at 202K, while the unemployment rate rises to 4.2%. The real labor market may still be in a 'cooling' state, but nominally, the U.S. economy remains strong.

Finally, global capital continues to flow into the U.S., and market liquidity faces no significant risks. Therefore, we remain bullish on U.S. stocks under the Trump trade, while Treasury yields and gold will face major tests.

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