21.02.2023
Snapback
The chart shows Qi's Fed Quantitative Tightening expectations factor. Early in 2022 it moved aggressively above trend (above zero) reflecting the Fed's move to shrink its balance sheet.
But it subsequently fell back below trend and one was reason why we (like others) flagged that, despite Fed rhetoric and rate hikes, aggregate financial conditions has eased.
Now its turned higher once again.
But it subsequently fell back below trend and one was reason why we (like others) flagged that, despite Fed rhetoric and rate hikes, aggregate financial conditions has eased.
Now its turned higher once again.
This is important because it reflects what the interest rate volatility market is discounting in terms of changes in the Fed's balance sheet.
Rate vol is still just below trend but it is bouncing; this suggests the recent 'mini and hidden' easing cycle is unwinding. The 'mini and hidden' easing cycle?
In recent weeks there has been a stream of articles recently pointing to the fact that, at the global level, Central Bank liquidity has been increasing.
Between TGA and Reverse Repos in the US, Yield Curve Control in Japan plus PBoC liquidity injections the net effect has been financial markets have actually benefitted from an easing of financial conditions.
Fed QT expectations are only one part of the overall liquidity picture but, given the role liquidity has played in justifying the recent rally in risky assets, this needs watching.
Consider the chart below for example:
Rate vol is still just below trend but it is bouncing; this suggests the recent 'mini and hidden' easing cycle is unwinding. The 'mini and hidden' easing cycle?
In recent weeks there has been a stream of articles recently pointing to the fact that, at the global level, Central Bank liquidity has been increasing.
Between TGA and Reverse Repos in the US, Yield Curve Control in Japan plus PBoC liquidity injections the net effect has been financial markets have actually benefitted from an easing of financial conditions.
Fed QT expectations are only one part of the overall liquidity picture but, given the role liquidity has played in justifying the recent rally in risky assets, this needs watching.
Consider the chart below for example:
It shows the breakdown of macro factors currently driving the S&P500 on Qi's Short Term models. Central Bank quantitative tightening expectations accounts for around a third of the model.
Both ST and LT models showed the S&P500 as rich in February. This week's sell off has closed the Valuation Gap. The critical issue now will be watching Qi model value to assess if we have a new bear trend.
QT for the ST model, economic growth and industrial metals for the LT model. Are these key drivers pointing to a new downleg in aggregate macro conditions; or are they being offset by others? Qi shows this in real-time.
Both ST and LT models showed the S&P500 as rich in February. This week's sell off has closed the Valuation Gap. The critical issue now will be watching Qi model value to assess if we have a new bear trend.
QT for the ST model, economic growth and industrial metals for the LT model. Are these key drivers pointing to a new downleg in aggregate macro conditions; or are they being offset by others? Qi shows this in real-time.
