Will The Sharp Contraction of ‘Liquidity’ in 2021 Continue Weigh on Global Activity in H1?

• We have seen that the sharp contraction in China ‘liquidity’ in 2021 has been weighing on domestic and (some) international asset prices in the past year, pricing in a significant slowdown in the global economic activity.
• The top chart shows that the annual change in ‘liquidity’, which define as the YoY change in China Total Social Financing (TSF) 12M sum, has acted a strong leading indicator of global manufacturing PMI in the past cycle.
• JPM global manufacturing PMI, which could be considered as a proxy for ‘real-time’ economic activity, peaked in May 2021 (56) and has been gradually testing new lows since then (declined to 53.20 in January).
• Even though China ‘liquidity’ seems to have reversed in recent months (with PBoC easing policy), periods of sharp 'tightening liquidity cycle' generally act with a lag of 9 to 12 months, therefore implying further economic slowdown in the near to medium term.
• Hence, constant downward revisions in growth expectations could limit the upside retracement in LT government bond yields.
• The bottom chart shows that US 10Y yield, which has shown strong relationship with the global manufacturing PMI, has been rapidly converging towards its ‘fair’ value in the past few months.
• The chart shows that US 10Y yield was 'too low' in 2021 relative to the 'stance' of the economy.

Source: Bloomberg/MNI.