China’s central bank, the People’s Bank Of China, now has the world’s largest balance sheet topping even the European Central Bank (ECB). Only The Federal Reserve is shrinking its balance sheet … for now.
The PBOC has injected almost $1.1 trillion in the market over the past two days.
One of the impacts of the balance sheet expansion and repo injections is a reduction in the volatiilty of Chinese stocks. Better known as “numbing volatility.”
On the sovereign side, China’s yield and swaps curves are kinked.
Central bank interfernce in markets seem to be never ending.
Global uncertainites abound. And with them, the US TReasury yield curve, the US Dollar Swaps curve, and the 1-month LIBOR curves are all kinked.
These curves are kinked all day and all the night.
The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.
And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.
Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.
Shrimp on the barbie, mate?
Ain’t this a kick in the head!
The US Framing Lumber Composite Index for December collapse. No, it isn’t just a seasonal effect since it hasn’t been happening in recent years. Just in 2018.
The decline is coinding with a general economic slowdown, although the various Fed Nowcasts are still above 2%.
Even Nicolas Cage knows it is slowing.
Since early November 2018 when the 10-year Tteasury note yield hit 3.24%, both the Treasury yield and 30 year mortgage rate (MBA) have plunged.
Partly to blame is the slowing economies around the globe, particularly in Europe (check out Ford’s announcement of job cuts in Europe: Ford Motor Co. will shed thousands of jobs at its European operations as part of a bid to return the business to profitability with a broad restructuring that could include shuttering factories).
And then there is that 13% YoY decline in China Passenger Car Sales.
So, despite global zero-interest policies (except for the US), global economies are slowing.
It is difficult to push US interest rates higher when the global economy is slowing down.
To be sure, there are a whole host of wild cards that could send interest rates rising again: 1) US-China trade agreement, 2) ending the US government shutdown, 3) resolution of the neverending BREXIT issue, 4) France and Germany’s struggles to raise energy prices (Paris Accord?), etc.
The implied probability of a Fed rate hike in this global environment is pretty low.
And both the US Treasury actives curve and Dollar Swap curve remain kinked.
Will The Fed emulate Frank Booth from “Blue Velvet” and provide more oxygen to markets?