WWRR Vol.2.015

2019 Global Economic and Market Outlook
Based on market exchange rates, the stock of central bank assets is not strongly correlated with
equity prices, and the relationship appears to be even weaker when central bank assets are
weighted by PPP exchange rates.
A similar narrative applies to the relationship between the flow of central bank net purchases
and equity prices. Indeed, the distinction between stocks and flows appears less important than
the exchange rate used to aggregate central bank balance sheets.
Fig 56 The relationship between central bank balance sheets (both in terms of levels and
net purchases) and equities is much weaker than is often claimed
Index
0.5
0.4
0.3
0.2
0.1
Central Bank Assets and Equities
Rolling 36-month correlation in monthly changes
Based on CB assets at
market exchange rates
Based on CB net purchases
at market exchange rates
0.0
-0.1
-0.2
Based on CB net purchases
at PPP exchange rates
-0.3
Based on CB assets at PPP
exchange rates
-0.4
11 12 13 14 15 16 17 18
Source: Macrobond, Macquarie Macro Strategy.
While we are in uncharted territory and remain cognisant of the unknown consequences of QE
unwind, in our view the weakness in this historical relationship is for good reason. In particular, we
think the primary channel through which QE affects the economy and financial markets is via
yields, with an expansion in the balance sheet placing downward pressure on the term premium.
As this would typically occur against a relatively weak economic backdrop, the overall direction of
risk asset prices is theoretically ambiguous (see the previous essay for further discussion).
In this respect, we expect the very gradual run-off in central bank balance sheets to coincide with
an increase in the term premium and long-term yields globally. While this will place downward
pressure on bond prices, we would expect the underlying backdrop to remain supportive of risk
assets. As such, and despite recent wobbles, our outlook remains for equity prices to continue to
gradually push higher over 2019, in contrast to fears that the end of QE will spell the end of the
equity bull market.
Fig 57 The primary channel through which QE propagates
is through the term premium and yields
US$tn
4
6
8
10
12
14
Central Bank Assets & Term Premiums
G4 CB assets (PPP,
inverted, LHS)
G4 CB assets (MER,
inverted, LHS)
Source: Macrobond, Macquarie Macro Strategy
Forecasts
16
US 10-year term
premium (RHS)
18
11 12 13 14 15 16 17 18 19 20
Bps
250
200
150
100
50
0
-50
-100
Fig 58 The very slow run-off in central bank balance sheets
will coincide with a gradual rise in yields globally
Per cent
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
10-Year Government Bond Yields
Japan
Germany
-0.5
12 13 14 15 16 17 18 19 20
Source: Macrobond, Macquarie Macro Strategy
US
Macq.
end-19
forecast
3.75%
1.25%
0.1%
4 December 2018 30