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Global Liquidity Update, June 2021: Good News Over?

Global Liquidity Update: Good News Over?   ·                 Markets are becoming stretched. Last year’s liquidity impulse is fading. Our analysis is at its most downbeat for two years. ·                 5-year Chinese government bond yields could drop by 50-100bp in the face of latest economic slowing, with a material pass-through into lower US rates.  

Central Bank Liquidity Growth Continues to Slow

Central Bank Liquidity Growth Continues to Slow   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth slowing to 21%, compared to the recent early-April peak of 35% ( 3m ann. rate). The G4 equivalent (ex. China) stands at 23% versus its 41% peak. The US Fed is clearly driving the slowdown: latest 28% vs. 78% peak. March and April saw some acceleration in ECB, Bank of Japan and Bank of England liquidity expansion but this has stalled through May/June. The People’s Bank of China remains the tightest of the majors in terms of net liquidity injections.      

A Skidding Dollar?

The US Dollar and the Asian ‘Euro’   The US dollar looks set to fall. Our analysis suggests 10-15% is likely, but we cannot rule out a more than 20% slump. The reasons are numerous and include the Fed’s easy monetary policy, the growing ‘twin deficits’ and the rival threat from China/ Asia. But applying Occum’s Razor, the standout risk is the changing direction of ‘safe’ asset flows out of US assets. Foreign investors are starting from huge relative positions in US safe assets built up over the past decade, with foreign issuance stepping up, competition is hot.       See our latest published research, Global View - The US Dollar and the Asian ‘Euro’ - June 2021  

Actions Before Words: Has the Fed Already Started Tapering?

Actions Before Words: Has the Fed Already Started Tapering?   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth stabilising at 25% from recent 30%+ clip ( 3m ann.). The G4 equivalent (ex. China) stands at 29% from the recent 37% average. A sharp slowdown in Fed liquidity growth underlies the downturn. Admittedly, latest data show a slight recovery but this is down to a base effect. The main driver has been a jump in reverse repos. Importantly, the squeeze is not being offset by a simultaneous rundown in the Treasury General Account. Elsewhere, ECB liquidity growth continues to outpace all other majors but it too has stalled, and the Bank of Japan and Bank of England are gradually reining in.  

The Beginning of the End? Fed Liquidity Growth Slows Sharply

The Beginning of the End? Fed Liquidity Growth Slows Sharply   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth dropping back to 25% from a 6-week average of +30% ( 3m ann.). The G4 equivalent (ex. China) slowed to 29% from the recent 37% average. The Fed is behind the downwards move, with monetary base growth slowing sharply to 40% (3m ann.), compared to a 70% average. Both reverse repos and non-reserve deposits rose sharply in the week. And, importantly, this slowdown is not being offset by a simultaneous rundown in the Treasury General Account. Elsewhere, liquidity growth is little changed on the previous week.    

Have Credits Peaked?

Where Are We In The Global Credit Cycle?   The Global Credit Cycle measures the riskiness of investing in the corporate credit markets. It is partly a derivative of the broader Global Liquidity Cycle and partly determined by investor positioning. We extract this data and show how it consistently leads the returns from both US and non-US high yield credit markets. Our research suggests: (a) the US credit cycle is running around 3 months ahead of other economies, and (b) the Global Credit Cycle is around its peak. This is not yet a signal to exit credit markets, rather a warning that conditions don’t get much better than this.    

Pledged Liquidity Continues to Flow

Pledged Liquidity Continues to Flow   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth stabilising around 30% ( 3m ann.). The G4 equivalent is similarly stable but higher due to the exclusion of China (37%). The US Fed and ECB remain at the forefront, with their monetary bases expanding, respectively, at 65% and 54%, on a 3-month annualised basis. Bank of Japan liquidity growth is lagging but clearly gaining momentum, hitting 30% in early May – ten times the rate two months ago.