2018 was the year when developed market central banks learned just how large of an addiction liability they’re running after a decade of ultra-accommodative monetary policy.
As a recalcitrant Fed kept hiking (pigeonholed, as Jerome Powell was, by the threat of an economic overheat in the US and prospective tariff-related price pressures), emerging markets crumbled in a harrowing summer rout. By Q4, risk assets of all stripes were in a tailspin and the Fed was on the verge of tightening the US into a slowdown.
By the end of the year, USD “cash” had outperformed some 90% of global assets.
That is the legacy of the short-lived effort to normalize policy. That, in a nutshell, is the legacy of quantitative tightening.
Fast forward to August 2019, and central banks are Alice back down the rabbit hole. This time around, Wonderland will be an even stranger place, given how low rates already are, and how bloated balance sheets remain.
That plunge has led to a stark reversal in two charts that depict the trajectory of global monetary policy. “Nearly 11% of central banks across the world are now lowering rates, the highest since May 2013”, BofA’s Barnaby Martin writes, in an August 5 note. For reference, the post-Lehman peak was 22%.
At the same time, the trend towards central bank balance sheet shrinkage has reversed.
“The peak of Quantitative Tightening was March this year [when] YoY CB balance sheet shrinkage was running at $750 billion”, Martin goes on to write, adding that “now, YoY central bank balance sheet shrinkage has fallen to just $100 billion”.
With the Fed having ceased runoff, the ECB likely to announce the resumption of net asset purchases and China FX reserves edging higher, we’ll likely soon be back in a “global QE” regime.
And yet, markets don’t believe it’s likely to work. Traded inflation continues to plunge and bonds are relentlessly bid, for example.
According to the latest edition of BofA’s European credit investor survey, “Quantitative Failure” is back to being the largest concern.
“A net 33% of investors say that this is now their biggest fear — the largest reading ever for this answer and up from just 13% last month”, the bank’s Martin writes, adding that “investors are fretting that after 700+ rate cuts and more than $10 trillion of asset purchases in the wake of Lehman, central banks’ monetary store cupboard is running bare”.
Need we say more?