The CrossBorder Capital Blog

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   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.    

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   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.    

Emerging Market Liquidity Update: Selectivity Is The Key   ·                 Investors already have near-fully invested positions in EM, particularly in the Asian Emerging Markets and Russia, based on holdings data   ·                 There may be questions about the scale of Chinese monetary easing, despite the surge in commodity markets, but there is little evidence that the PBoC is tightening    

Global Liquidity Update: Buying Into The 'New Abnormal'   ·                 The most important investment number is no longer the high street inflation rate, but the real rate of Central Bank monetary base growth. ·                 The US dollar is being undermined by the rising pace of the so-called twin deficits

Job Done: Central Bank Liquidity Close to a Peak?   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth tick higher to 31% ( 3m ann.). The G4 (exc. China) equivalent is growing at an even faster 38%. The Fed and ECB are behind this week’s improvement, and they continue to outpace all other majors. The Bank of Japan and Bank of England stepped up the pace of monetary expansion in the second half of March, although latest data show some retracement. The People’s Bank of China continues to keep a tight rein on liquidity provision.  

Taper Talk – Does This Global Liquidity Boom End With A Whimper Or A Bang?   Investors are looking stage left, reassured by the slow approach of faster high street inflation. They are missing the more sudden and threatening stage-right appearance of booming home prices and a skidding US dollar. These two misbehaving financial prices cannot be ignored by policy-makers or investors for too long. The Global Liquidity Cycle has already peaked and is falling: the debate now concerns how hard it falls? Will taper talk hasten the drop? Be prepared.