Liquidity Impulse

Think of it this way

It does not measure how much water is in the tank; it measures whether more is coming in than going out, and how fast. A half-full tank that is filling up and another half-full tank that is draining look the same in a snapshot and have nothing in common.

What is Liquidity Impulse?

What matters is not how much liquidity there is, but whether it is increasing or decreasing and how fast. This indicator takes the change in net liquidity over the last 20 days and normalizes it against its history over the last three years.

How to read Liquidity Impulse

It almost always oscillates between −3 and +3, and on 76% of days it is between −1 and +1, which is noise and says nothing. Above +1, money is entering the reserve accounts of banks and dealers at an unusual pace: there is more cash available to lend, to fund positions or to buy debt. Below −1 it is leaving those same accounts, and the system is getting tighter than normal. Lag: none, or +15 days at most: the cash is already in the accounts.

What Liquidity Impulse means for the market

Markets respond more to changes than to levels. A system with abundant but shrinking liquidity is usually worse for risk assets than one with scarce but growing liquidity. The values of this series are calculated with a z-score, and that is the reference missing from the others: it answers whether the current move is large FOR THIS ERA. It takes the change over the last month and compares it with everything that series did over the previous three years, and the result is expressed in standard deviations, which is why the axis runs from −3 to +3 rather than in dollars. An example of why it matters: a move of 93 billion in 2021 gave an impulse of 0.07, that is, absolute routine; a smaller one, of 80 billion in 2017, gave 0.71. The same dollar amount does not mean the same thing in two different regimes.

Where the money flows

It measures how fast the reserve accounts that banks and dealers hold at the Federal Reserve fill up or empty out; these are the accounts from which a bank can extend credit and a trading desk can fund positions. Whether the money then reaches the price of an asset is one more step, and that one depends on human decisions. Example: in a week when the Treasury pays pensions and there are no large auctions, those accounts fill up and this indicator turns positive.

What to watch in Liquidity Impulse

Look for zero crossings, not extremes. Between −1 and +1 it is noise and says nothing. What is informative is the switch from negative to positive or vice versa, especially after a long streak with the same sign. Values beyond ±3 are rare —only 2.4% of days— and the full historical range runs from −6.1, in late 2015, to +15.9, in the week of the Lehman Brothers collapse in September 2008.

Measures the acceleration of liquidity, not its level. It is the derivative.