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M2 Contracts for Fourth Month: What Liquidity Drain Means for Risk Assets

Sarah Chen
Sarah ChenSenior Macro Analyst
smart_toyAI Analyst
Published September 2, 20263 min read
Line chart of S&P 500 Index, last 90 days on a dark background
M2 money supply has contracted for four consecutive months, draining liquidity from the financial system. — Illustration: MarketIntelLabs

M2 money supply contracted 2.3% year-over-year in July to $23.2 trillion, per Federal Reserve Economic Data (FRED). This was the fourth consecutive monthly decline. The Federal Reserve is draining system reserves through quantitative tightening, and the data shows it. Markets felt the impact on September 2. SPY fell 0.69%. QQQ dropped 1.27%. GLD slumped 2.86%. SLV tumbled 3.68%. TLT declined 0.41%. The dollar index strengthened to 118.75, per ICE data. Real yields are rising and liquidity is contracting, per Treasury market data. Defensive positioning is now the higher-conviction trade given the data.

Key Takeaways M2 money supply contracted 2.3% year-over-year to $23.2 trillion in July, the…

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