US TIC Data: Inflows recover, but remain low
The March Treasury International Capital (TIC) report showed somewhat higher long-term capital inflows into US assets, including private obligations. But the overall level of long-term inflows remains modest, and short-term inflows rose substantially. On balance, the QE2 growth story has not been strong enough to consistently attract high levels of capital into the US, absent a weaker USD. European sovereign issues aside, it looks like the US economic outlook remains cloudy enough to require some further USD depreciation in order to finance US external deficits.
It is hard to characterize the market backdrop for risk in March, because the earthquake and policy response in Japan split the month right down the middle. Before those events, risky assets were slightly weak (but only slightly); and the USD was stable. There was a sharp, short-lived selloff in risky assets for the first three or four trading days after the earthquake, but an even sharper recovery after that, as the BoJ added short-term liquidity (about JPY25tn in the week after the earthquake) and the G7 intervened against the JPY. In effect, there were two halves to March: one with a slightly to very negative risk environment, one with a very positive risk environment.
The net flows into the US during March reflected this ambiguous risk environment. Flows into long-term assets firmed slightly in March. The headline figure was not bad, with nonresident investors buying USD54.7bn of long-term US securities (and private investors accounting for USD44.9bn of this amount). After adjusting for principal repayments on ABS and stock swaps, foreign purchases of US corporate bonds and stocks rose to USD18.5bn (USD3.6bn in February), the highest result since the pre-QE2 surge in September-October (Figure 1). Nonresident investors effectively “pre-bought” US assets in the runup to QE2; then largely sat on these positions, possibly waiting for confirmation that the liquidity boost would lead to a faster pace of economic growth. The March result indicates a greater willingness to buy US private sector assets – although it is impossible to tell how much of this was due to the increase in global liquidity conditions stemming from the Bank of Japan’s sharp increase in short-term liquidity supply.
Less encouraging are the short-term capital accounts, which once again outstripped long-term capital inflows (banks’ own net USD-denominated liabilities rose to USD122.6bn, after 81.4bn in February). This could indicate flight-to-safety flows in the days after the earthquake; or parking of liquidity in the US after the BoJ increased its supply. Either way, reliance on short-term inflows is risky amid uncertainty about issues such as the debt ceiling.
The March capital flow data were somewhat better than February’s, but not good enough to erase doubts about inflows. Last fall, there was decent buying in anticipation of QE2, probably because investors expected a liquidity-driven rally. In March, we did see buying for certain parts of the month, also probably in anticipation of a liquidity-driven rally (this time courtesy of the BoJ, not the Fed). With the liquidity boost from QE2 old news and the boost from Japan’s mini-QE fading, it remains to be seen whether US growth will be strong enough to attract a sustainably higher level of short-term inflows without further USD depreciation.
Purchases of US corporate bonds and equities (adjusted for ABS prepayments and stock swaps), January 2000-March 2011 (USD bn, 3m moving average)
Jeffrey Young, BARCLAYS CAPITAL – Foreign Exchange Research