Chart(s) of the Day: February 20, 2023
Can liquidity increase with a hawkish Fed?
In today’s Chart(s) of the Day we will take a look at two separate charts that each provide a view of the aggregate actions of global central banks.
The movement of central bank balance sheets provides an indication of each respective institutions impact on the overall global liquidity environment. Typically, a rising liquidity environment will provide a boost to the prices of risk assets — and when liquidity dries up, risk assets will usually sell off.
The Federal Reserve has been shrinking its balance sheet throughout 2022, attempting to withdrawal liquidity from the financial system in the hope of reducing aggregate demand and taming inflation. See Figure 1. Not surprisingly, risk assets performed horribly during 2022, with the S&P 500 down 27% at the October low.
What some market participants seem to forget is we live in a global economy with global markets that facilitate the free flow of capital. The Federal Reserve, while the most important central bank, is not the only game in town. In Figure 1, it can be seen that the ECB, BOJ, and PBOC were all reducing the size of their balance sheets during 2022 — it was all hands on deck in the fight against inflation.
Something changed at the end of 2022 and in early-2023 — the BOJ, PBOC, and even the ECB are no long shrinking their balance sheets. In fact, the BOJ and PBOC are actively expanding their balance sheets.
Are global central banks offsetting the Fed’s hawkish stance? Figure 2 implies this might be the case.
Figure 2, from @tedtalksmacro, is an aggregation of the 4 primary central bank balance sheets seen in Figure 1. Total assets have now turned and are once more beginning to rise. This is supportive of global liquidity and is a major shift from the environment seen during the entirety of 2022.
Macro analysts must pay attention.
— Brant
Disclaimer: The content provided on the Capital Notes newsletter is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision. Always perform your own due diligence.