Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week: China credit impulse
Christopher Dembik
Head of Macroeconomic Research
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
Click here to download this week's full edition of Macro Chartmania.
Here and there, we hear that the market is too optimistic about the recovery and that next year many challenges, from vaccine delivery to wave of bankruptcies, remain that could seriously jeopardize the exit from the pandemic era. At Saxo, we don’t think we are wearing red-colored glasses when we say that the year 2021 should be marked by a strong global recovery driven by central bank liquidity and positive growth impulse from China. The below chart represents the evolution of China credit impulse which is basically the change in the growth rate of aggregate credit as a percentage of gross domestic product. This is certainly one of the most important indicators for investors looking to know where the global economy is heading into next year. It is worth watching it as it leads the global economy by 9 to 12 months. For the first time since the 2015 yuan devaluation, China credit impulse is running above 5% of GDP. To be precise, it was standing at 6.2% of GDP in Q2 this year, at the time of the global lockdown. Even if credit impulse is close to a peak for the downturn phase of this mini-cycle, the flow of credit from the worst period of the health crisis will continue to support the global recovery at least until the end of Q1-Q2 next year. The strong improvement in China credit impulse is one of the two reasons, along with the sharp increase in global central bank liquidity since the outbreak, that makes us optimistic about the economic recovery next year. It will not be linear, and there will certainly be difficulties, but it is safe to say as this chaotic year is about to end that the worst is probably behind us. In terms of investment decision, the strong push in credit from China should be good for risky assets (notably emerging and frontier markets) and contribute to the reflation narrative.
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