With the Federal Reserve and the European Central Bank having resumed the expansion of their balance sheet, the world’s five major central banks are now on roughly the same page with respect to monetary policy – and have now been rowing in the same direction since early 2019.
Monetary policy is generally seen as having a lag in its impact on the overall economy, and Brandywine Global observes that so far, the dollar has indeed stayed stubbornly strong while leading economic indicators in the major developed economies have remained muted.
However, the big central banks’ moves have improved leading economic indicators for smaller and emerging market (EM), notably in Mexico, Turkey and Australia.
The U.S. economy, of course, has also benefited from fiscal stimulus, in the form of a tax cut and increased deficit spending. The lessons from that success are not lost on Europe’s policy makers, who are actively considering similar moves to nurture their own nascent turnaround.
Strengthening prices have boosted the economies of commodities-driven economies in Africa at the same time as record low interest rates have driven the cost of borrowing downward.
The result, according to a November report by the International Monetary Fund (IMF), has been to put the government debt of 20 out of the 54 countries in Africa «near or at distressed levels» – meaning that in the IMF’s estimate, those countries may have difficulties making good on their expanded debt obligations.
In 2019 to date, governments in Africa have borrowed about $ 26 billion in international markets, roughly the same as in 2018, as the demand for returns in a negative-yield world drove up lending – especially in so-called hard-currency bonds, those issued in euros, dollars, and yen.
But with current commodity prices still strong and interest rates still low, it’s little surprise that the African Development Bank considers African countries’ debt-to-GDP ratio to be still «well within acceptable limits».
As the end of 2019 approaches, the largest U.S. banks are reducing their levels of cash on hand. As of December 10, 2019, top banks now hold about 31% of their total «liquidity pools» in the form of cash, compared to 2018’s 41.2% and 2017’s 42.6%. Instead, the banks are choosing to hold U.S. Treasuries.
That’s what’s behind the increased demand in the repo market in recent months, as transactions that used to be settled in cash are finding banks to be increasingly reluctant to lend it overnight.
The crunch is an unanticipated result of post-2008 regulations designed to strengthen bank balance sheets by discouraging bank’s own dependence on the repo market for short-term cash. So banks’ new balance sheet strength has paradoxically generated decreased stability in the overnight market, with the Federal Reserve stepping in to absorb the extra demand by boosting its own lending – and thereby increasing its own balance sheet rather than that of the banks.
Note: The year for all dates is 2019 unless otherwise indicated
 The Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ), Peoples’ Bank of China (PBoC).