Earlier today, we warned (again) that the central bank liquidity flow backstop – i.e. the “rising tide that’s lifted all boats” for eight years – is on its way out the door. Slowly, but surely.
We also highlighted commentary from BofAML, who notes that the Mario Draghis, Janet Yellens, and (especially) the Haruhiko Kurodas of the world are being extra careful when it comes to pulling the rug from beneath markets.
You’ll recall that in the wake of “liftoff” (i.e. the December 2015 Fed hike), markets collapsed as the combination of the Fed, China’s telegraphing of more RMB weakness via the adoption of a trade-weighted benchmark index, and slumping crude prices created a deflationary nightmare. It took the “Shanghai Accord” and a dovish lean from the Fed in March, 2016, to arrest the slide.
Well, Morgan Stanley is out with a new piece reliving that drama through the eyes of the high yield market. Included in their analysis is a great visual that shows you just how dependent assets (still) are on the ubiquitous central bank put.
Via Morgan Stanley
At 93 months, the current cycle is already longer than all but two post-war recoveries (out of 12 total). We could certainly debate why this expansion is already longer than normal, but strong growth is clearly not the reason. In fact, quite the opposite – a lackluster economic backdrop for years, leading to massive central bank support,has likely kept the cycle going more than anything else. Last year is a good example. As we show below, early in the year, with oil collapsing and the economic data rolling over, recession risks were seemingly rising. As Exhibit 3 shows, central banks across the globe responded. Even the Fed provided stimulus (verbally) by allowing the market to go from pricing in almost three rate hikes at the end of 2015 to almost zero rate hikes in summer 2016. Markets recovered,and the economic data followed.
Right. And can you guess what that means going forward?
In our view, for the cycle to last another several years, we want to see more of the same – a continued environment of ‘ok’ growth and low inflation, which allows central banks to keep the party going.
In short: what we need is for the data to, on balance, disappoint. That way central banks have an excuse to “keep the party going.”