Fed joins stimulus party as global trade slumps
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All three major blocs of the world economy have shifted gears dramatically over the last month, preparing a fresh blast of stimulus to combat the sharpest contraction in global trade since the 2008-09 crisis.
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By Ambrose Evans-Pritchard
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9:52PM BST 23 Aug 2012
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The US Federal Reserve in Washington DC Photo: REUTERS
The US Federal Reserve appears poised for a third round of quantitative easing (QE) as soon as early September, joining Europe and China in concerted global stimulus.
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The Fed’s latest minutes show broad support for fresh bond purchases – probably mortgage bonds – unless signs of “substantial and sustainable strengthening” emerge soon. Paul Ashworth from Capital Economics said QE3 looks like a “done deal” since little is likely to change between now and the next Fed meeting.
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The shift in Fed policy caught markets by surprise and comes after the European Central Bank’s chief Mario Draghi opened the door to potentially “unlimited” purchases of Italian and Spanish bonds to prevent a euro break-up.
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The most radical moves appear likely from China where the managed “soft-landing” risks spinning out of control, with exports contracting on a month-to-month basis over the summer.
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“People should worry less about Europe right now and look more closely at Asia,” said Hans Redeker, currency chief at Morgan Stanley. “We think the Bernanke and Draghi 'puts’ will drive a further rally in global equities. But China represents the biggest risk to our bullish asset call.”
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The move to full throttle by global authorities comes as the latest shipping data confirmed fears that large parts of the global system buckled in the mid-summer.
“Global trade is contracting at the fastest pace since 2008,” said Stephen Jen from SLJ Macro Partners. “The exports of Korea, Taiwan and Japan are contracting, and China is in stark deceleration.”
Container shipping volumes to Europe fell 9pc in June from Asia and 7.5pc from North America. The CPB World Trade Monitor in the Netherlands shows that trade volumes have been shrinking for the last five months. The Baltic Dry Index measuring freight rates for bulk goods has crashed to Great Recession depths.
The long-awaited rebound in China has yet to materialise. China’s HSBC manufacturing index fell further below the contraction line of 50 to 47.8 in July, with export orders plunging and output prices sliding deeper into deflation. “The report is plainly awful,” said Yao Wei from Societe Generale.
Money market rates in China have jumped 20 basis points since July, overwhelming efforts by the central bank to inject liquidity. “Capital is fleeing the country,” said Morgan Stanley.
Andrew Roberts, head of credit at RBS, said the moves in the Chinese money markets have become a neuralgic issue in the City. “People are asking whether this is the beginning of a credit crunch in China,” he said.
China’s Politburo is taking no chances. It has ditched a key plank of its reform strategy for now, reverting to blunderbuss spending on infrastructure and new factories to keep the crisis to bay.
Earlier this week the city of Chongqing unveiled a $240bn blitz on cars, chemicals and other industries over the next three years, equal to 150pc of its GDP and to be financed by state banks. Tianjin has followed with $240bn (£151bn) over five years on aeronautics, heavy equipment, and energy; Guangdong has listed 177 projects worth $160bn.
In America, the fresh stimulus by the Fed may raise eyebrows. The US economy has recovered slightly after slowing to stall-speed earlier this summer, Goldman Sachs tracking growth of 2.3pc in the third quarter.
Core inflation is above 2pc and the M3 “broad” money supply is growing at a robust pace of around 5pc, though this may be distorted by flight to safety. “People are still hoarding money because of the chronic lack of confidence,” said Capital Economics’ Mr Ashworth.
These are not normally conditions that call for printing money. The Fed is clearly taking precautions in case of multiple shocks ahead, including a mini-crisis in Washington as the “fiscal cliff” looms at the end of the year. The Congressional Budget Office says the US faces a “significant recession” next year if automatic fiscal tightening equal to 4pc of GDP goes ahead.
Yet the Fed is also acting as a superpower central bank, moving early to head off any risk of a global downward spiral. Chicago Fed chief Charles Evans called yesterday for fresh stimulus “around the world”.
Central banks can certainly buy time and trigger powerful asset rallies. Whether they can counter the deeper malaise of excess global savings – a record 24pc of GDP – or excess manufacturing plant worldwide is a larger question. It tormented economists in the 1930s, and has come back to haunt them today.
