Steno Signals #35 – Everyone is going to be surprised by rising global liquidity!
We have spent many hours discussing the liquidity outlook in the US, but developments elsewhere are also interesting. JPY+CNY liquidity is on the RISE, which has turned the tide on GLOBAL liquidity
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Let’s have a look at GLOBAL liquidity trends since something really interesting may be happening beneath the surface of the financial market.
Most macro pundits in the US (or in Europe for that matter) spend COUNTLESS hours in USD liquidity forecasting and Fed watching, but as balance sheets of other big central banks have grown substantially more impactful in recent years, we obviously ought to track liquidity on a global scale and not on a local scale.
Interestingly, we see an increasing discrepancy between the big three Western central banks and trends seen elsewhere. The Bank of England, the ECB, and the Fed (outside when the US Treasury wreaks havoc with it) are all still trying to bring down the balance sheet size, while the Bank of Japan and the People’s bank of China now actively move in the opposite direction.
Chart 1. Increasingly diverging liquidity trends in Asia relative to the West
In China, the rebound in liquidity / reserves is obviously linked to the reopening and we received the latest set of monthly M2 growth numbers last week with compelling evidence of a renewed spike in money/credit creation in China through January. If the Politburo is now actively underpinning credit creation (to save the momentum in Chinese RE), we ought to see it as a positive global liquidity impulse relative to last year, where even China had no or even negative credit creation.
Chart 2. Credit is now GROWING in China again
Bank of Japan officials have also clearly started increasing the balance sheet to support the yield curve control through January. The balance sheet increase of Bank of Japan OUTPACED the Fed liquidity aircraft carrier from March-2022 in “annualized” USD-terms in the run-up to the last BoJ meeting and remember that the Japanese economy is around 1/4 the size of the US ditto. CRAZY numbers.
Net/net the combination of PBoC liquidity injections, massive BoJ YCC efforts and the US Treasury drawing down on the Treasury General Account have been enough to already TURN THE TIDE on global liquidity. If global liquidity truly bottomed in late 2022, it ought to be massive news for asset allocation.
Chart 3. Global liquidity bottomed in November 2022, which is a main driver of the current equity “optimism”
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INteresting Topic: Do central banks compete to be more impactful?
Also, is the discrepancy between the "reserve currency" status central banks (Fed, ECB ) and BoJ and PBoC due to the desire to extract more seigniorage by the latter?