现金流与流动性：财政调整和财政状况

1、F&L LibraryFiscal adjustments & financial conditionsGlobal Markets Strategy10 June 2019Below are excerpts of past issues of Flows & Liquidity on the topic of: Fiscal adjustments & financial conditions. The excerpts can be found in reverse chronological order, with the most recent update below. The e

2、xcerpts are not updated and are accurate only as of the date indicated. Generally, we do not email out this document, but maintain it on J.P. Morgan Markets as a reference tool.What happens into the first cut? ( HYPERLINK /research/content/GPS-3028623-0 extract from Flows & HYPERLINK /research/conte

3、nt/GPS-3028623-0 Liquidity, 07 Jun 19)Rate markets saw a sea change over the past two weeks with the inversion at the front end becoming the norm rather than theexception.The magnitude of rate cuts expected over the next 1-2 years ranges from around 10bp for the ECB and SNB to 15bp for the BoE and B

4、oJ to around 50bp of rate cuts for BoC, RBA and RBNZ and 100bp for theFed.This expectation universal easing is boosting government bond markets. do equity markets do well when central banks cutrates?The answer is it depends on the reason central banks are cuttingrates.History shows that when the cut

5、s rates in a weakening growth environment the equity market tends to performpoorly.When the Fed cuts rates to provide insurance even as the current backdrop remains resilient, like in 1995 1998, the market tends to performstrongly.And this is the challenge equity markets going forward. The thesis th

6、at equity markets appear to be pricing in at the moment following Fed officials comments earlier this is a pre-emptive that is set to insurance similar to the 1995 and 1998episodes.If, on the other hand, the Fed ends up being rather reactive, equities could follow a weak trajectory similar to more t

7、ypical previous Fed easing rather than the strong trajectory seen during 1995 or1998.History shows that UST continued to rally and the UST continued to steepen up to 6 months on average after the first Fed rate spreads widened on average during the first 6 months following the first Fed rate cut. Th

8、e dollar was on average on an upward trajectory for up to 3 months following the first Fed ratecut.Investors sought to protect against Italian political risk via BTP shorts and reduced foreign ownership of Italian assets over the pastyear.Global Markets Strategy Nikolaos Panigirtzoglou AC (44-20) 71

9、34-7815 HYPERLINK mailto:nikolaos.panigirtzoglou nikolaos.panigirtzoglouBloomberg JPMA FLOW J.P. Morgan Securities plcMika Inkinen(44-20) 7742 6565 HYPERLINK mailto:mika.j.inkinen mika.j.inkinenJ.P. Morgan Securities plcNishant Poddar, CFA(91-22) 6157-3255 HYPERLINK mailto:nishant.poddar nishant.pod

10、darJ.P. Morgan India Private LimitedSee page 21 for analyst certification and important disclosures. HYPERLINK / The inversion at the front end of the curve used to be a US-only phenomenon up until recently. But the past two weeks have seen a sea change in global interest rate markets with the inver

11、sion at the front end becoming the norm rather than the exception. This is shown in HYPERLINK l _bookmark0 Figure 1 and HYPERLINK l _bookmark1 Figure 2 which depict expectations of central bank policy rates at the front end of Developed Market yield curves. With the exception of Scandinaviancountrie

12、s,i.e. Sweden and Norway, all the other yield curves are downward sloping at the front end as markets are now pricing in cuts from most DM central banks over the next year or so.Figure 1: Central bank rate cuts priced in at the front end of DM curvesIn %;0.20-1eur usd gbp jpy aud nzd sek chf cadSour

13、ce: J.P. Morgan.The magnitude of rate cuts expected over the next 1-2 years ranges from around 10bp for the ECB and 15bp for the BoE and BoJ to around 50bp of rate cuts for BoC, RBA and RBNZ and almost 100bp for the Fed. As mentioned above Scandinavian central banks are the only exception where some

14、 rate increases are still priced in, albeit much smaller than even the recentpast.This rate market expectation of almost universal central bank easing contrasts with the experience over the past years when tightening was far from universal, with only a few central banks led by the Fed managing to de

15、liver meaningful rate hikes. It is thus striking how the market backdrop shifted from selective tightening to universaleasing.This expectation of universal easing is boosting government bond markets and by extension bond-like equities such as utilities, telecoms and high dividend yield stocks. And t

16、here is little doubt that these bond like equities will get further support if rate cut expectations intensify and government bonds rally further. Butthispricing of universal easing by rate markets is raising questions about the overall direction of equity markets. Do equity markets do well when cen

17、tral banks cut rates?The answer is it depends on the reason central banks are cutting rates. If the reason is weakening growth then this is not a good environment for equities overall, especially cyclical sectors, even as defensive and bond like equities do relatively well in such environment. Indee

18、d these cyclical risks is the main reason we recommended investors to HYPERLINK /research/content/GPS-3026760-0 “Expand hedges” in our monthlypublication HYPERLINK /research/content/GPS-3026760-0 Global Asset Allocation thisweek.If, on the other hand, the reason central banks are cutting rates is to

19、 provide insurance against future downside risks even as the current growth backdrop remains resilient, then these rate cuts would most likely bolster equitymarkets.The historical experience is indeed consistent with this distinction. This is shown in HYPERLINK l _bookmark2 Figure 3 which depicts th

20、e trajectory of the S&P500 index before and after the first Fed rate cut in previous ten easing cycles. The 1995 and 1998 Fed rate cuts, as insurance against EM (Mexican and Russian default/LTCM) crisis at the time, bolstered the equity market. In only one other occasion, following the April 1980 Fe

21、d rate cut, did the S&P500 see stronger performance than following the 1995 and 1998 rate cuts. However, at the time, in April 1980, the equity market was boosted by an unprecedented 8.5% reduction in the Fed funds rate from 20% to 11.5%, a magnitude of easing that is obviously not possible in the c

22、urrent conjuncture.Figure 2: Rate market expectations of DM central bank policy ratesUSDCADNZDAUDGBPSEKJPY EURCHFUSDCADNZDAUDGBPSEKJPY EURCHF2.502.001.501.000.50And this is the challenge for equity markets going forward. The thesis that equity markets appear to pricing in at the moment following Fed

23、 officials comments earlier this week, is one of a pre-emptive Fed that is set to provide insurance similar to the 1995 and 1998 episodes. If, the other hand, the Fed ends up being rather reactive, i.e. either because the Fed starts cutting rates later in the year rather than in June or July, becaus

24、e it is too late and the US economy has already entered a weak phase, then the equity market could follow a weak trajectory similar to more typicalprevious Fed easing cycles rather than the strong trajectory seen during 1995 or1998.What about other asset classes? HYPERLINK l _bookmark4 Figure HYPERL

25、INK l _bookmark3 Figure HYPERLINK l _bookmark4 Figure 7 and HYPERLINK l _bookmark5 Figure 8 show that UST continued to rally and the UST curve continued to steepen for up to 6 months on average after the first Fed rate cut. Credit spreads widened on average during the first 6 months following the fi

26、rst Fed rate cut. The dollar was on average on an upward trajectory for up to 3 months following the first Fed rate cut. But after then it gave back some of the previous gains as the Fed rate cutsbit.Figure 3: The trajectory of the S&P500 index before and after the first Fed rate cut% change from in

27、dicated date, number of weeks in x axis0.00-0.50-1.00Jun19Sep19Dec19Mar 20Jun 20Sep20Dec20* Adjusted for the differential between policy rates and O/N OIS rates. For USD OIS, adjusted forthedifferentialbetweentheO/NOISrateandIOER.ForCHF,weuse3-monthforwardswap rate as the SNB targets 3-monthLibor.So

28、urce: J.P. Morgan0-10-20-30-40Jul-74Apr-80Jun-81Oct-84 Oct-87Jun-89Jul-95Jan-01Sepxcluding these three Fed easing cycles of 1980, 1995 and 1998, the trajectory of equity markets following the first Fed rate cut has been rather negative. This is shown in HYPERLINK l _bookmark3 Figure

29、4 which averages the behavior of the S&P500 index before and after the first rate cut.in 7 of the previous 10 Fed easing cycles. This negative trajectory of the S&P500 especially in the first three months following the first rate cut is consistent with our original argument above: when the Fed cut r

30、ates in a weakening growth environment the equity market tends to perform poorly. HYPERLINK l _bookmark3 Figure 4 also shows that equity prices stay low for up to 9 months following the first Fed ratecut.Source: J.P. MorganFigure 4: The average trajectory of the S&P500 index before and after the fir

31、st Fed rate cut in 7 of the previous 10 Fed easing cycles (excluding 1980, 1995 and 1998)% change from indicated date, number of weeks in x axis6.04.02.00.0-2.0-4.0-6.0-8.0-10.0ource: J.P. MorganFigure 5: The average trajectory of the 10y UST yield before and after the first Fed rate cu

32、t in 7 of the previous 10 Fed easing cycles (excluding 1980, 1995 and 1998)Change of the yield in %, number of weeks in x axis-0.2-0.4-0.6-0.8ource: J.P. MorganFigure 6: The average trajectory of the 10y -1y UST yield spread before and after the first Fed rate cut in 7 of the previous 1

33、0 Fed easing cycles (excluding 1980, 1995 and 1998)Change of the yield spread in %, number of weeks in x axis0.40.0-0.4-130133952Source: J.P. MorganFigure 7: The average trajectory of the US BBB-AAA long-dated corporate yield spread before and after the first Fed rate cut in 7 of the previous 10 Fed

34、 easing cycles (excluding 1980, 1995 and 1998) Change of the credit spread in %, number of weeks in x axis50.100.050.00-0.05-0.10-0.15-0.20-130132652Source: J.P. MorganFigure 8: The average trajectory of the USD trade weighted index before and after the first Fed rate cut in 7 of the previous 10 Fed

35、 easing cycles (excluding 1980, 1995 and 1998)% change from indicated date, number of weeks in x axis2.001.501.000.500.00-0.50-1.00-1.50-2.00-2ource: J.P. Morgan.Evidence of a Fed balance sheet impact from survey-based measures of term premia ( HYPERLINK /research/content/GPS-2909640

36、-0 extract from Flows & Liquidity, 08 HYPERLINK /research/content/GPS-2909640-0 Feb 19)We have argued previously in this publication that the Feds balance sheet contraction can reverberate through financial markets via four channels: changes in bond demand/supply; crowding out of US HG corporate bon

37、ds, tightening liquidity/funding conditions in the banking system, and portfolio rebalancing via investors shifting down the risk curve. The last of these channels, the portfolio rebalancing channel, could manifest itself through risk premia in risky assets (e.g. credit spreads), but also term premi

38、a in bond markets. In principle, it should depress them as central banks expand balance sheets and exert upward pressure as QEreversed.The problem, however, is that term premia are not directly observable and must instead be inferred by trying to separate out term premia from expectations of future

39、short term rates. This can be done, for example, using surveys to estimate the expectations component and to infer term premia. Another is the literature around term structure models (see for example HYPERLINK /publ/qtrpdf/r_qt1809h.htm Term Premia: HYPERLINK /publ/qtrpdf/r_qt1809h.htm models and so

40、me stylized facts in the Sep 2018 BIS Quarterly Review for a recent review on term structure models).Survey-based methods and term structure models, and variants of the latter, all have their benefits and drawbacks. Using survey-based estimates of future short rates is simpler, though the downside i

41、s that they tend not to get updated very frequently. Termstructuremodels, by contrast, are computationally more complex, are subject to parameter uncertainty, and the resulting estimates of term premia are very sensitive to model specification. Moreover, these estimates will change over time as mode

42、l parameters are updated.With these caveats in mind, we look first at twowidely- used examples of term structure models from the Fed, the ACM and Kim-Wright models ( HYPERLINK l _bookmark6 Figure 9). They suggest at best only a modest trend higher in term premiumestimates.Turning to a survey-based e

43、stimate, we use the twice- yearly long-range consensus estimates in the Blue Chip survey to construct a spot 10y expectation of Fed policy rates. These estimates, in the June and Decembersurveys each include estimates for each of the next five years and a roughly 5-10y ahead expectation. We can then

44、 infer a term premium by subtracting this estimate from 10y nominal yields as well as the 5-10y ahead estimate from 5y,5y forward rates. These survey-based estimates are shown in HYPERLINK l _bookmark7 Figure 10, and suggest that there has been some persistent upward pressure on term premia from mar

45、kets pricing in and the Fed eventually delivering a balance sheetcontraction.Admittedly survey-based measures can exhibit volatility at times, e.g. due to slower updating of economists policy rate forecasts relative to markets. we believe that survey-based measures capture well broader trends in ter

46、m premia. And this is important when gauging the impact term premia from the Feds balance sheet normalization process as in our mind the impact operates as a background force over long periods of time and has less bearing on higher frequency fluctuations in UST yields.Figure 9: Term structure model

47、estimates of term premia in 10y USTs%ACMKim-Wright4.0ACMKim-Wright3.53.02.52.01.51.00.50.0-0.5-1.003 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19Source: Federal Reserve.See Kim and Wright (2005), An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and D

48、istant-Horizon Forward Rates, and Adrian, Crump and Moench (2013), Pricing the Term Structure with Linear Regressions.Figure 10: Term premium estimate inferred from the Blue Chip survey% 10y spot TP5y 5y fwd TP1.5 10y spot TP5y 5y fwd TP1.00.50.0-0.5-1.0-1.503 04 05 06 07 08 09 10 11 12 13 14 15 16

49、17 18Source: Blue Chip Economic Indicators, J.P. Morgan.In all, there is evidence from survey-based measures that the Feds balance sheet tightening has been exerting some upward pressure on term premia through the portfolio balancechannel.A return to asset reflation ( HYPERLINK /research/content/GPS

50、-2902236-0 extract from HYPERLINK /research/content/GPS-2902236-0 Flows & Liquidity, 02 Feb19)With the Fed not only signaling a pause but also raising the possibility of rate cuts, the yields of all asset classes are on a declining trajectory in a reversal from last yearsincreases.Therefore, the ass

51、et relation trade that had boosted financial assets strongly in the five period to 2017, is now back in operation again after a year-long interruption during 2018.In the equity space, a declining yield environment in a reversal from last discount rate increases, implies considerable PE multiple expa

52、nsion from here given the severity of the PE multiple contraction lastyear.Further, an early completion of the Feds balance sheet shrinkage process could add fuel to this years asset reflation trade by also inducing investors to move up the risk curveagain.High Grade credit in particular would be a

53、major beneficiary of an early completion of the Feds balance sheet shrinkage process as the crowding effect would diminish.Hedge funds delivered negative alpha, but a decent degree of convexity lastyear.A substantial proportion of the Feds duration absorption since 1Q09 has already beenunwound.Persi

54、stent short base inbonds.Chinas twin inclusion into global equity and bond indices is set to intensify this year and next, increasing the importance of Chinese onshore assets in global portfolios.The Fed continued to respond to last years tightening in financial conditions by making another decisive

55、 dovish shift in January. It removed its tightening bias in this weeks FOMC meeting and signalled an earlier completion of its balance sheet shrinkage process. In particular, Fed Chair Powell noted in the press conference that “the normalization of the size of the portfolio will be completed sooner,

56、 and with a larger balance sheet, than in previous estimates.” In our opinion this decisive dovish shift, to the extent it is sustained, is removing of the headwinds that caused the 2018 market rout and sets the stage for 2019 to be an asset reflationyear.We had argued before in this publication tha

57、t central banks led by the Fed had inflicted significant tightening in financial conditions during 2018 via both quantitative and pricing channels. In particular, the quantitative tightening from the Feds balance sheet shrinkage, combined with the decline in bond demand from the ECB and BoJ, could h

58、ave reverberated via four channels: bond supply and demand, crowding out of US HG corporate bonds, liquidity/funding squeeze in the banking system and portfolio rebalancing via investors shifting down the risk curve. The main transmission mechanism for the pricing channel was via higher USD cash yie

59、lds. The rise in US Libor rates to well above 2% last year, caused a repricing of not only fixed income assets but also equities. In other words, the yields of all asset classes had risen in tandem lastyear.With the Fed removing its tightening bias, not only are markets becoming less concerned about

60、 the prospect of even higher USD cash yields, but they can contemplate the possibility of rate cuts. This raises the likelihood of a generalized decline in yields taking place across asset classes this year in reversal to last years increases ( HYPERLINK l _bookmark8 Figure 11). Therefore, the asset