x
_thumbnail_id: Array
author: Array
_author: Array
article_modules: Array
_article_modules: Array
modules: Array
_modules: Array
modules_2_download_box_download_box_title: Array
_modules_2_download_box_download_box_title: Array
modules_2_download_box_download_box_button_text: Array
_modules_2_download_box_download_box_button_text: Array
modules_2_download_box_download_box_button_url: Array
_modules_2_download_box_download_box_button_url: Array
modules_1_title: Array
_modules_1_title: Array
modules_1_content: Array
_modules_1_content: Array
modules_1_download_box_download_box_title: Array
_modules_1_download_box_download_box_title: Array
modules_1_download_box_download_box_button_text: Array
_modules_1_download_box_download_box_button_text: Array
modules_1_download_box_download_box_button_type: Array
_modules_1_download_box_download_box_button_type: Array
modules_1_download_box_download_box_button_url: Array
_modules_1_download_box_download_box_button_url: Array
modules_1_download_box: Array
_modules_1_download_box: Array
modules_2_quote_author: Array
_modules_2_quote_author: Array
modules_2_enable_tweet: Array
_modules_2_enable_tweet: Array
modules_2_quote: Array
_modules_2_quote: Array
modules_3_title: Array
_modules_3_title: Array
modules_3_content: Array
_modules_3_content: Array
modules_4_title: Array
_modules_4_title: Array
modules_4_content: Array
_modules_4_content: Array
modules_5_background_image: Array
_modules_5_background_image: Array
modules_5_video_title: Array
_modules_5_video_title: Array
modules_5_video_thumbnail_url: Array
_modules_5_video_thumbnail_url: Array
modules_5_video_url: Array
_modules_5_video_url: Array
modules_5_video_duration: Array
_modules_5_video_duration: Array
modules_5_video_description: Array
_modules_5_video_description: Array
modules_5_video_embed_code: Array
_modules_5_video_embed_code: Array
modules_6_title: Array
_modules_6_title: Array
modules_6_content: Array
_modules_6_content: Array
modules_5_image_caption: Array
_modules_5_image_caption: Array
_yoast_wpseo_content_score: Array
article_modules_0_title: Array
_article_modules_0_title: Array
article_modules_0_content: Array
_article_modules_0_content: Array
article_modules_1_download_box_download_box_title: Array
_article_modules_1_download_box_download_box_title: Array
article_modules_1_download_box_download_box_button_text: Array
_article_modules_1_download_box_download_box_button_text: Array
article_modules_1_download_box_download_box_button_type: Array
_article_modules_1_download_box_download_box_button_type: Array
article_modules_1_download_box_download_box_button_url: Array
_article_modules_1_download_box_download_box_button_url: Array
_yoast_wpseo_primary_category: Array
_wp_old_slug: Array
_yoast_wpseo_title: Array
page_summary: Array
_page_summary: Array
article_modules_2_title: Array
_article_modules_2_title: Array
article_modules_2_content: Array
_article_modules_2_content: Array
article_modules_1_quote_author: Array
_article_modules_1_quote_author: Array
article_modules_1_enable_tweet: Array
_article_modules_1_enable_tweet: Array
article_modules_1_quote: Array
_article_modules_1_quote: Array
_yoast_wpseo_focuskw_text_input: Array
_yoast_wpseo_focuskw: Array
_yoast_wpseo_linkdex: Array
article_primary_tag: Array
_article_primary_tag: Array
_wp_old_date: Array
_yoast_wpseo_metadesc: Array
_dp_original: Array
_edit_lock: Array
_edit_last: Array
article_modules_3_title: Array
_article_modules_3_title: Array
article_modules_3_content: Array
_article_modules_3_content: Array
article_modules_4_title: Array
_article_modules_4_title: Array
article_modules_4_content: Array
_article_modules_4_content: Array
modules_0_module_title: Array
_modules_0_module_title: Array
modules_0_background_color: Array
_modules_0_background_color: Array
modules_0_module_type: Array
_modules_0_module_type: Array
modules_0_filter_posts_by_taxonomy: Array
_modules_0_filter_posts_by_taxonomy: Array
modules_0_filter_posts_by_tags: Array
_modules_0_filter_posts_by_tags: Array
modules_0_link_text: Array
_modules_0_link_text: Array
modules_0_link_url: Array
_modules_0_link_url: Array
modules_1_text: Array
_modules_1_text: Array
modules_2_module_title: Array
_modules_2_module_title: Array
modules_2_background_color: Array
_modules_2_background_color: Array
modules_2_column_ratio: Array
_modules_2_column_ratio: Array
modules_2_editor_content_left: Array
_modules_2_editor_content_left: Array
modules_2_button_text_right: Array
_modules_2_button_text_right: Array
modules_2_button_type_right: Array
_modules_2_button_type_right: Array
modules_2_button_url_local_right: Array
_modules_2_button_url_local_right: Array
How worrying is Quantitative Tightening?
Views

How worrying is Quantitative Tightening?

Moritz Sterzinger Weekly bulletin January 2019
As stock markets slowly recover from last year’s slide, discussions about the trigger for the sell-off still abound. Was it softening manufacturing data from China or its trade tensions with the US? Or was it everyone’s favourite scapegoat, the Fed, raising interest rates too aggressively? Another potential culprit that has not received as much attention in this search for a suitable narrative is the Fed’s reversal of its previous Quantitative Easing (QE) programmes. Via a process fittingly dubbed “Quantitative Tightening” (QT), the Fed has begun to shrink its balance sheet, which had more than doubled since 2009 from c. USD 2trn to c. USD 4.5trn by 2014. At the same time, the ECB has now phased out its own ambitious QE programme, which allowed it to purchase up to one third of bond issues in the European market.

In light of the recent stock market turmoil, parts of the financial community have argued that this takes monetary tightening too far, creating unnecessarily strong headwinds for risk assets and the wider economy.

Much of the reasoning as to why QT could constitute a major policy error rests on the assumed effectiveness of QE. It is true that if you chart the Fed’s balance sheet against the S&P 500, both steadily go up in tandem. But correlation does not imply causation – indeed, you would see the same co-movement if you plotted either of them against global carbon emissions. To conclude that QE was the main driver for stocks going up since they bottomed in 2009 ignores the fact that big corporates have been enjoying very healthy profit growth throughout that period. Moreover, savings and hence demand for financial assets remain high as populations around the world grow older and Asian countries look to recycle their trade surpluses.

It is harder to deny that QE has suppressed bond yields. The question is how large its impact has been and what this implies for a reversal of such policies. Let’s take another look at the Fed’s balance sheet against US 10-year treasury yields (see below). If the aim of QE was to bring down long-term interest rates in an attempt to boost asset prices, its success was mixed, as treasury yields still exhibited significant up-and-down swings while QE was in operation.

Those concerned about QT may well be overstating the impact of central bank intervention on long-term interest rates and the resulting effect on other financial assets.

Source: Bloomberg

Due to its larger scale relative to its economy, the ECB’s QE may have had a more pronounced effect. With the exception of Italy, government bond yields for Eurozone countries have been trading in a narrow range since the ECB initiated its own QE programme in 2015. But then again, if QE was such a key factor here, why has its phasing out not led to more upward pressure on bond yields thus far?

Source: Bloomberg

“Thus far” is a key qualification. The next big monetary experiment has only just begun, and as central banks proceed with tightening monetary conditions, the effects of raising short-term rates in conjunction with QT will become more visible. This does not only apply to equities and high-yield bonds, but also to the currency markets. The economy is a complex system, and just like the proverbial flap of a butterfly’s wings can cause a hurricane, QT may be the last bit of snowfall that sets off an avalanche. However, without further evidence, Quantitative Tightening will remain for now at the bottom of my worry list. At this point in time, ham-fisted actions by politicians and government executives seem like a greater risk to the world economy.

For more information, please contact Moritz Sterzinger, Director at JCRA, at moritz.sterzinger@jcrauk.com.

 

Recent Insights

Views
Emerging Markets – Panic Justified?
Lionel Kruger Weekly bulletin August 2019
Views
The new normal
Richard Conway Weekly bulletin August 2019
Views
Trash & Burn
Rishin Patel Project Finance & Infrastructure August 2019

Contact us

If you need hedging or debt advice or would like to speak to the team, please get in touch.