Archives par catégories : United States

World Trade: Recovering Without the Emerging Markets

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World trade has bounced back a bit since the end of summer. The improving European economy is one big reason. For its part, US demand has been trending more favorably since mid-year. And lastly, Japanese imports are ramping up, posting year-on-year volume growth of 5% in recent months despite significant yen weakening. So the improvement is broadly based and starting to have an impact on activity, at least in the developed countries.

Which means that, yes, this rosy picture leaves out the emerging countries, which continue to grapple with unusually soft growth in demand for imports. The reason for the anomaly? China is buying less, which is hurting export activity in the other emerging countries; Japan has reasserted itself; and demand for capital goods is sluggish. As a result, the driving force behind intra-regional Asian trade – and trade among emerging countries in general – has slackened considerably.

These trends take some of the luster off of the enthusiasm sparked by the encouraging signs coming from the developed world.

Is the U.S. Economy Really Out of the Woods?

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The Federal Reserve has finally yielded to a combination of market pressure and the macroeconomic data of the past few months. From January onward, the U.S. central bank will be cutting the pace of its monthly asset purchases by $10 billion—from $85 billion at present to $75 billion. While that still qualifies as significant life support, the overriding message is that monetary policy will soon be on its way back to normal. So a previously dreaded change of course is now being greeted as good news by the markets. The Dow Jones responded positively to the Fed’s announcement, as did the dollar.

But the tapering process in the cards will necessarily affect expectations about the target interest rate. And since the Fed has maintained its goal of a more extensive policy shift as soon as the unemployment rate drops below 6.5 percent, long-term yields are even more likely to continue upward. This leads to the big question of whether the U.S. economy can cope with a further increase in those yields.

The three reasons we do not see QE ending

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The three reasons we do not see QE ending

Statements by Ben Bernanke and the release of minutes from the most recent FOMC meeting have erased any doubt sparked by the Fed’s September 18 change in communication, reinforcing expectations that asset purchases will be tapered. Most observers now think the tapering will come in March. We remain wary of the consensus for three main reasons. The first is our view of current U.S. economic trends, which we do not see improving enough to meet the Fed’s stated targets for growth or inflation in the coming months. The second is the inevitable effect that QE tapering would have on long-term interest rates, which the economy is still too weak to withstand.

How long will the last of Frankfurt’s safeguards hold?

The writing was on the wall: the ECB would have to do more as the hour of the Fed’s QE tapering approached. Here we are. Whether or not the Fed goes through with it – our previous article showed that we do not think it will – expectations of a reduction in asset purchases are already having a huge effect on markets and capital allocation around the world. By drying up the market for Treasury bonds, the Fed has been diverting capital flows from U.S. markets into numerous other assets for more than a year now, most notably into emerging and euro zone sovereign bonds. By tapering its QE, the Fed would restore the U.S. market to its rightful place, thus creating the conditions for investments to flow back into the U.S. Emerging markets and euro zone sovereign markets are thus particularly vulnerable to any change in the direction of Fed monetary policy.

The ECB could use Janet!

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The ECB could use Janet!

What a difference a week makes – between Mario Draghi expressing apparent relief at having wrung a 25 basis point rate cut out of the ECB monetary policy committee he chairs, and future Fed Chairwoman Janet Yellen, who in confirmation hearings before the Senate left no doubt that the Fed is not yet ready to reduce its level of support to the U.S. economy. Even more tangible than this contrast is the sense of frustration that many are feeling on this side of the pond. The ECB President is no Janet!

Did you say deflation?

After three years of policy that has been deflationary in every respect, the sudden panic triggered by weak euro zone inflation numbers comes as a surprise. The tone was set way back in 2010 with the adoption of the European Commission’s Stability Programme and the song has been the same ever since as the sovereign debt crisis deepened.

Fiscal Cliff, Sequester, Shutdown: What Next?

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The latest showdown in Washington raises a whole host of questions and conjectures about what will come after the agreement struck yesterday by the U.S. Senate. A closer look at the most crucial issues involved is therefore in order.

From Political Farce to Economic Instability

Viewing the federal government shutdown of the past two weeks as political farce may help mitigate the gnawing anxiety over how large a threat it represented to the world economy. In fact, however, this most recent tug-of-war has thrown a new quandary into bold relief: the economy is increasingly at the mercy of politics at its very worst. In other words, our economic future may be shaped by partisan wrangling, even of the most ludicrous variety. This is not just an umpteenth American specialty, either. It is a tendency inherent in the lingering crisis that has bedeviled the advanced economies for over five years now, and it introduces a new kind of risk—unpredictable, uncontrollable risk with the potential to wreak havoc. While the too-big-to-fail syndrome may still look like it can shield us from the disaster scenario—federal government default—we would be well-advised to brace ourselves in this new phase for serial drama over the issue of U.S. sovereign debt and fiscal policy.

Plenty of room for more political strife. 

How much fiscal tightening in 2014? 

When will the downgrade occur?

What rates? What policy from the Fed?

What does it all mean for growth? 

Scenario 2013-2014: The Financial Crisis, Act III…and Epilogue?

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New round of central bank liquidity injections worldwide

  • The U.S. economy can’t do without Fed support
  • The euro area is out of recession, but bank sector and sovereign issues remain
  • The Fed, BoJ, BoE and ECB continue to nurse ailing economies

Continued low interest rates are not enough to dispel emerging risks

  • The momentum driving global trade has been undermined for the foreseeable future
  • China can no longer act as the global engine of growth
  • Foreign exchange rate adjustments appear inevitable

Is inflation, end-point of the financial crisis, around the corner? 

  • New round of liquidity injections, currency crises, geopolitical tension, labor unrest…
  • … Inflation remains the most likely scenario, but the path ahead is unclear

A Fresh Round of Central Bank Action Coming Up in 2014

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If we’re correct in assuming the Federal Reserve is not about to start scaling back its asset purchases, worldwide liquidity injections should hit a new high next year. Whereas the aggregate balance sheet of the four leading central banks showed little change in the first half of 2013, we can expect widespread central bank activism over the next few quarters:

  • At a rate of 85 billion dollars a month, the Fed’s asset purchases should amount to 1.02 trillion dollars a year.
  • The Bank of Japan will be adding anywhere from 600 to 718 billion dollars to its balance sheet as it strives to meet its target of expanding Japan’s monetary base by between 60 and 70 trillion yen a year (making it some 40 percent larger than at the beginning of 2013).
  • The Bank of England will be buying 610 billion dollars’ worth of Gilts in connection with its objective to purchase 375 billion pounds of assets via its Asset Purchase Facility.
  • The ECB’s probable upcoming LTRO is likely, in our estimate, to provide Europe’s banks with between 250 and 500 billion euros, or 350 to 750 billion dollars.

The “Big Four” should thus be injecting a cool 1.6 to 2.5 trillion dollars into the system in annual terms (at a pace of 135 to 208 billion a month). This should continue, if not throughout 2014, then at least through the early part of the year. In the low-case scenario, that would equal 10 percent of American GDP; in the high-case scenario, it would equal almost the entire size of France’s economy in 2012! But whether the ECB follows suit or not, the annual flow of fresh liquidity should return to the highs seen in 2011 and 2012—and for the ECB’s LTROs, could even set a post-2008-crisis record.

How Far Will the Dollar Fall Now?

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Over the past few years, we have been resolutely bearish on the dollar, in contrast to the consensus view. The reasons behind our contrarian outlook are three-fold:

  • We foresee lastingly low GDP growth now that the 2008 crisis has brought an end to the support previously provided by private sector debt—creating a shortfall we estimate at 1.8 percent a year, and pushing U.S. potential output down from its pre-crisis 3.0–3.2 percent range to somewhere between 1.5 and 2 percent today.
  • We expect the Federal Reserve to stick to its unconventional monetary policy for now and the greenback to continue losing ground as a result. To make matters worse, the euro area has opted for a structurally deflationary policy mix to sustain the euro, even if that means undermining European industry.
  • We anticipate an eventual inflationary exit from the 2008 financial crisis—one that will almost certainly affect the United States much sooner than the euro area.

These factors also prompted us to cut our projections for the dollar in June, when we simultaneously lowered our 2014 forecast for the U.S. economy—and thus for long-term Treasury yields as well. Although challenged by developments since the early summer, our bearish dollar outlook seems once again pertinent in the wake of this week’s FOMC meeting.

So just how low might the dollar fall?