What a farce of a day. The S&P 500 ground higher all session to close up 83 bps. At the same time, implied correlations, the VIX, and dispersion all moved lower, while the VIX 1-Day rose. Market mechanics at their finest. In essence, traders were buying short-term hedges and likely selling longer-dated IV to fund them. All this ahead of tomorrow’s NFP report.

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But even with all that, the VIX 1-Day only rose to 13.7, suggesting the market isn’t particularly concerned about the NFP report. In fact, the VIX 1-Day moved more on Nvidia’s results than it did today. If the market is worried, it has a strange way of showing it. I would have expected a higher reading, which probably also means the volatility crush after the data release isn’t going to be very big. For context, the S&P 500 rose only about 30 bps on August 28, the day after Nvidia’s results.

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Unless the intent was simply to inflate IV overnight and then pressure S&P 500 futures lower. In that scenario, a post-NFP rally is still possible—it ultimately depends on how market dynamics play out.

It’s an interesting dynamic in the market right now—the push and pull between mechanics and liquidity. Liquidity is clearly being drained, with reserve balances this week falling to $3.17 trillion, the TGA rising to $661 billion, and the reverse repo sitting at just $20 billion. The TGA still needs to increase by roughly $200 billion, which would put reserves on pace to finish September around $2.95 trillion—pretty much in the middle of the range I had previously expected.

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This is affecting the overnight funding market, with the average repo rate at 4.47% today—a level typically seen at month-end. On the surface, it suggests the cost of overnight financing is rising.

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In the past, the effects of changes in reserves have varied, so it’s still too early to say whether the market is already feeling the impact. The rise in repo rates does indicate that excess liquidity in the system has largely been absorbed. The real signal will come if and when the Standing Repo Facility is triggered as repo rates push above 4.5%.

That said, one could point to stocks like Wingstop (WING) and argue that the lag could be as long as 12 weeks.

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—or look at something like the SMH ETF and say it’s just 10 weeks.

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