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Central banks are growing their balance sheets again

Cross asset weekly pic
Supported by expansionary policies around the globe, liquidity measures such as global real M1 have expanded at a healthy pace. In previous cycles, this has led to improving sentiment and production data. We remain confident that monetary policy will be successful this cycle again, although tighter labour markets and higher debt levels imply that the cyclical rebound will likely be weaker than in previous cycles.
This notion of ample liquidity has been further supported by the Fed’s and the ECB’s decision to increase the size of their balance sheets again. With all major central banks’ assets now growing again in 2020, global liquidity measures are likely to continue their upward trend. Global bond markets should react with somewhat higher yields and steeper curves in the coming months, while this strongly suggests that equity markets will advance further into Q1 2020.
Finally, we note that despite all of the criticism, the decline in policy rates to below the zero lower bound seems to have worked more smoothly than anticipated, and have not been the main driver of the subdued FX-volatility regime in past years. However, it is evident, that central banks have to do a better job in communicating the advantages of unconventional monetary policies to the public. Otherwise, they could be in danger of losing their independence.

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