The Positives in Japan's Negative Rate Decision

Japan’s surprise shift to negative policy rates looks a carefully scripted attempt to deliberately weaken the Yen, possibly because policy-makers fear a much lower Chinese Yuan. Since this further delays what we see as an inevitable (Yen positive) fiscal policy easing, we now expect more near-term Yen weakness. Looking more broadly, the BoJ move signals that negative rates have become an acceptable policy-option and one that the US Fed could also embrace. A higher gold price may be the obvious winner from this general breaking of the zero lower bound (ZLB).

 More Global Liquidity Troubles

The GLI™ (Global Liquidity Index) fell heavily again in January 2016 to 35.1 (‘normalised’ range 0-100) from 42.2 at end-2015. Liquidity is a leading indicator, predating the real economy by 12-15 months and financial markets by 6-9 months.

 Emerging Market Liquidity may be bottoming? 

The EMLI™ (Emerging Market Liquidity Index) sub-component of our GLI™ rose in January 2016 to 27.0 (‘normalised’ range 0-100) from 23.8 at end-2015. This EMLI™ rise contrasts with the slump in the overall GLI™ to 35.1, highlighting the worsening picture for the Developed Markets.

The Emerging Market Liquidity Index (EMLI™), our forward-looking indicator of investment risk and future economic prospects, ended the year at a low 30.2, or barely changed on the month and only a tad higher compared to end-2014. The GLI™ (Global Liquidity Index) and the EMLI™ both warn of continued tough investment markets and slower economic activity ahead.

Global Liquidity, our forward-looking indicator of investment risk and future economic prospects, slid lower at the end of 2015, closing the year at an index value of 41.8 (‘normal’ range 0-100). This compares to 50.2 for end-2014. The GLI™ (Global Liquidity Index) essentially trended lower consistently through 2015 and its low level warns of continued tough investment markets and slower economic activity ahead. 

The recurring 8/9 year pattern of market crises – 1973/74, 1980/81, 1989/90,1997/98 and 2007/08 – threatens to repeat again in 2016. US liquidity is falling and pan-Asian liquidity remains weak. Only the Eurozone can boast strong liquidity conditions, and here the sizeable interventions of the ECB mean that the Euro will likely stay under downward pressure. Our three overriding concerns centre on: (1) the implications of still huge Chinese capital outflows (US$146 billion forDecember) for the Chinese markets and Asian economies; (2) the persistent weakening in US corporate cash flow with its negative implications for credit spreads, share buy-backs and economic activity, and(3) the further risks to general market liquidity associated with the Fed’s US rate hike and step-up in reverse repo activity (US$572 billion 6th January).

Global Liquidity, our forward-looking indicator of investment risk and future economic prospects, slid lower at the end of 2015, closing the year at an index value of 41.8 (‘normal’ range 0-100). The Emerging Market Liquidity subcomponent (EMLI™) settled at a far lower index value of 30.2, or barely changed on the month and only a tad higher compared to end-2014. The GLI™ (Global Liquidity Index) and the EMLI™ both warn of continued tough investment markets and slower economic activity ahead.

Global Liquidity our forward-looking indicator of investment risk and future economic prospects slid lower at the end of 2015, closing the year at an index value of 41.8 (‘normal’ range 0-100). This compares to 50.2 for end-2014. The GLI (Global Liquidity Index) essentially trended lower consistently through 2015 and its low level warns of continued tough investment markets and slower economic activity ahead. Liquidity is not yet at the sub-30 index levels that warn of economic recession and financial crisis, but this is consistent with choppy markets that grind lower. Three particular statistics focus our attention: (1) US private sector liquidity growth (index 65.9); (2) Chinese Central Bank (PBoC) liquidity provision (index 37.3) and (3) net capital inflows/ outflows from China (minus US$146 billion, or US$0.8 trillion of net outflows for 2015). However, since PBoC actions largely rest on the pace of capital outflows, the second and third factors essentially boil down to the same capital flow question: When will China’s capital flight end?

This report explains why we use liquidity indexes to measure Central Bank behaviour and shows that, contrary to popular belief, the US Federal Reserve may not be as ‘loose’ as its low interest rate stance suggests. In short, further rate hikes in 2016 risk a policy error.

US private sector and Chinese PBoC liquidity plus cross-border flows to EM are critical factors.