Head of Macroeconomic Research
Summary: This is a preliminary version of a more extended piece that we will publish soon on one of the most important topics for the end of the year: global liquidity.
In the chart below, you have the evolution of liquidity injection by the 22 biggest global central banks expressed in percentage point of global GDP. After years of massive central bank asset purchases and monetary expansion, central bank liquidity has started to contract since Q2 2018. The amplitude of the contraction was quite elevated, reaching at lowest level at minus 3.2 p.p. of global GDP early this year.
As the money flood started to recede on the back of QT, the macroeconomic and market outlook started to look less favorable, sentiment deteriorated, and many investors started to wonder whether stocks are not too highly valued. On the top of that, trade war friction and global trade recession contributed to higher risk sentiment and, ultimately, to stronger USD, which can be considered as counter-intuitive as Fed QT should normally have a deeper impact inside the US than outside. But, as we all know, the USD is a problem for everyone, except for the United States in the current international monetary system.
Based on the latest data, we notice an emerging interesting trend: central bank liquidity is slowly turning. It is still deeply in contraction territory, with the negative consequences it implies for the market, but it is moving upwards, currently at minus 2.5 p.p. of global GDP. For now, the bulk of the improvement is related to positive liquidity injection from the BoJ. However, this improvement may be short-lived in the coming two or three months as central bank liquidity could move downward again as reserve scarcity in the US financial system accelerates.
But – and this is the important point – when looking a bit forward, there are early signals that central bank liquidity conditions could considerably improve into Q1-Q2 2020 due to more accommodative stance from central banks and especially restart of ECB QE anytime soon and Fed rate cut of 50 bps by the end of the year. If it is confirmed - and this is still an early call - it could open more positive perspectives for 2020. Interestingly, we also start to have a slight improvement of our favorite macro gauge, the global credit impulse, that points out to a potential global GDP growth rebound in H1 2020, mostly driven by the US.
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