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 : Global central bank liquidity
Christopher Dembik
Head of Macroeconomic Research
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
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Today, we look at the evolution of liquidity injections by central banks. At Saxo, we believe that in the era of central bank power, it is of prime importance to closely monitor the evolution of central bank liquidity to make the appropriate investing decisions. The below chart tracks the evolution of total liquidity injection by the twenty two biggest global central banks expressed in percentage point of global GDP. In the wake of the outbreak, central banks all around the world have opened up widely the wave of liquidity to avoid a liquidity crunch and help companies and households overcoming the consequences of the health crisis. Such a flow of liquidity is unprecedented in modern history, with the combined liquidity injection by the G3 central banks (Fed, ECB and BoJ) representing the stunning level of 9.6 percentage points of global GDP in Q3 this year according to our calculations – a level that has not even been reached during the GFC. The current central bank liquidity impulse is three times bigger than during the Great Recession. So far, the Federal Reserve has been the most important contributor to global central bank liquidity, with a level of injection climbing to 9.3 percentage points of global GDP since the outbreak, followed up by the ECB. This amount of central bank liquidity that has flowed into financial markets is the main explanation behind the strong performance of the equity market over the past few months. With more positive vaccine news in sight, especially the likely FDA’s approval of the Pfizer vaccine on 10 Dec, and more monetary stimulus to come in the next two to three weeks, investors have all reasons to wear rose-colored glasses right now, and get prepared for an ultimate year-end rally in the stock market. When looking a bit forward, we expect central bank liquidity injection will recede next year, as economic recovery will start to materialize, but central banks will continue to act appropriately and will remain accommodative on the long run, thereby avoiding that the level of debt becomes a problem or that interest rates rise too sharply. Among the measures that may be taken, we anticipate additional forward guidance on QE by the Fed and the ECB and the extension of the corporate financing support program by the BoJ.
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