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Global QT: what central banks haven’t learned

  • The latest central bank research on QT is careful, rigorous, and grounded in the literature
  • Unfortunately its main conclusion - that QE affects markets while QT doesn't - is at odds with the lived experience of most market participants
  • There is a much simpler reason why QT has had so little apparent impact
  • Misunderstanding of this dynamic greatly contributes to the likelihood of future policy mistakes
fed reserves vs equities 6m chg

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Bordeaux, Champagne, and the art of blending earnings

  • The rally in risk is often attributed to strong earnings
  • But calendar earnings estimates have mostly been falling
  • Macro drivers, not organic estimate optimism, are the true source of the markets' strength

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Sticky supply, not dynamic demand

  • After several months of liquidity tailwinds, risk asset pricing is starting to look excessive
  • Improving spending, orders and hiring are all positives
  • Despite this, earnings estimates are falling
  • Fundamentals are reflective more of sticky supply than of dynamic demand
  • Ongoing price pressures may well curtail central banks' desire for dovishness
  • But excitement about higher r* remains overdone
labour hoarding

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Free replay clip: Outlook 2024

  • Free-to-view replay of first segment of 16 Jan webinar
  • Why strategists struggled in 2023
  • A better way to think about markets
  • Implications for 2024
outlook 2024 webinar snapshot

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Outlook 2024: tight credit, easy money

  • The remarkable performance of risk assets in 2023 is not primarily due to the growing likelihood of a soft landing
  • It instead reflects markets being buffeted by extraordinary amounts of central bank liquidity
  • For now, those technicals remain positive, but beyond Q1 they should fade or reverse
  • Underlying momentum in growth, earnings and inflation - beyond sticky supply-side effects - is significantly weaker
global credit impulse private vs central bank

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Seasonal Satorical Verses (free)

  • Hark! The VC angels sing
  • God rest ye, merry crypto bros
  • While PMs watched tech stocks take flight
  • I'm dreaming of a tight market
  • To be sung, please, in a spirit of global harmony
AI-generated central bank christmas scene

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The #1 rule about outlooks

  • The biggest surprise of 2023 was not the resilience of the US consumer
  • It was that central banks added nearly $1tn in liquidity, rather than removing $1tn as had been widely expected.
  • This swing alone is worth 20% on equities - almost exactly the YTD gain in the S&P.
  • We think 2024 will show central banks have overtightened rates whilst simultaneously overstimulating risk assets.
  • But we also fear their misunderstanding of the dynamics means they may yet do more of both.
fed reserves vs spx

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Some slides on the S&P rally

  • The rally does not reflect the likelihood of a soft landing
  • It is the direct consequence of a surge in Fed liquidity
  • Widespread misunderstanding of these dynamics increases the likelihood of more rate rises and a harder landing later
spx vs fed reserves 4wk chg

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Central bank liquidity update

  • Poor risk asset performance in Sep/Oct reduces gap to CB liquidity
  • Fed $300bn reserve increase over past eight weeks helps explain renewed rally in S&P
  • Conversely, despite talk of stimulus, China liquidity injections remain lacklustre
  • Liquidity outlook still driven by RRP - and is much less negative than might be expected
6m central bank liquidity vs equities

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The mind-bending maths of fiscal financing

  • Persistent fiscal deficits are increasingly cited as the #1 reason to short bonds
  • But the historical record is remarkably and perplexingly clear
  • High debt levels, and even high fiscal deficits, have historically been associated with bond yields falling, not rising
  • Only in part does this reflect factors like financial repression
  • It is also due to the counterintuitive nature of the credit creation process itself
us debt vs rate levels

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