China Credit Expansion Slows While the Fed Sticks To Its Guns
Global credit expansion has recently slowed, largely due to China’s attempt to reduce systemic financial risks. Meanwhile, US credit origination still appears to be holding up at a respectable pace.
The US yield curve remains positively sloped, thereby implying continued economic growth. Meanwhile, China’s funding markets are currently experiencing a liquidity squeeze which has been accentuated by the People’s Bank of China’s (PBoC) attempt to stymie excess credit creation. Greater pessimism about the country’s economic outlook has produced a much flatter yield curve.
The Federal Open Market Committee (FOMC) continues to normalise its policy rate, but it is now feeling emboldened enough to discuss reducing the size of the Fed’s bloated balance sheet. Continued undershooting of the 2% inflation target will slow the speed at which policy settings adjust.
China’s soft currency peg to the US dollar will mean that balance sheet shrinkage by the Fed will have policy implications for the PBoC. Meanwhile, Hong Kong is particularly vulnerable to a significant tightening of liquidity should the Fed embark on a more aggressive policy course.
Although data dependency still drives US monetary policy, changes in financial conditions will also affect the speed of progression towards the FOMC’s goal of removing excessive accommodation. Any change in leadership at the Fed would raise the importance of policy communication in preventing financial market turbulence that could potentially trigger a repeat of the events witnessed during 1987.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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