Liquidity Is Ample, But Risk Remains

This week's rash of central bank meetings has concluded, and the take away message is that the major central banks have not begun to remove the extraordinary liquidity provisions. Even Australia, which hiked rates for the second time recently, seems to be signalling a gradual approach.

The Federal Reserve Wednesday did not change the substance of its message that, despite stronger growth, it is in no hurry to raise rates. The slack in the factor markets, (unutilized industrial capacity and elevated unemployment), the subdued inflation readings and the stable inflation expectations measures were the explicit factors cited.

The ECB's Trichet hinted that the mid-December 12-month fixed rate funding operation will be the last one. Reading between the lines, a shorter dated operation, say six months, seems more likely than a variable rate tender. Short term euro money rates are trading above the overnight deposit rate but below the 1% weekly repo rate -- even 1-year money in the interbank market is quoted at 95 basis points.

The Bank of England is the only major central bank to extend its QE program. While the GBP25 billion is at the low end of expectations, in this context, the key point is that liquidity, which we believe is a critical driver, remains ample.

That ample liquidity in turn means that the fundamental fuel for the risk on trades, and in the current context, that is a weight on the US dollar. The liquidity assessment would also seem positive for equities in general and emerging markets. It is also likely consistent with curve steepening in the fixed income markets.

Disclosure: No positions

Comments

[tunaman4u2:]

"It is also likely consistent with curve steepening in the fixed income markets"

How come bonds have been so behind? These are negative returns after taxes & inflation. I just dont get how rates can be as low as they are

Nov 06 07:57 AM