We’re going to do it…We’re going to do it…We’re not going
to do it…Yet.
Last week, the U.S. Federal Open Market Committee
gave stock markets a gift that, on a scale of thrills, might have been on par
with Marilyn Monroe singing happy birthday to JFK. On Wednesday, the FOMC
announced (without a trace of breathiness):
“Taking into
account the extent of federal fiscal retrenchment, the Committee sees the
improvement in economic activity and labor market conditions since it began its
asset purchase program a year ago as consistent with growing underlying
strength in the broader economy. However, the Committee decided to await more
evidence that progress will be sustained before adjusting the pace of its purchases.
Accordingly, the Committee decided to continue purchasing additional agency
mortgage-backed securities at a pace of $40 billion per month and longer-term
Treasury securities at a pace of $45 billion per month.”
The ensuing euphoria pushed many of the world’s stock
markets higher. The Dow Jones Industrial Average set a new record, Germany’s
DAX closed at a new high, and Japan's Nikkei delivered its best performance in
eight weeks. Emerging markets also reaped positive benefits.
The Quantitative Easing or QE-sugar buzz abated when St. Louis Fed
President James Bullard told Bloomberg the Fed may decide to begin buying fewer
bonds at its next meeting in October. This surprised some as analysts already
had predicted it wouldn’t happen until December which caused markets to slump a
bit last Friday.
It’s possible that, by mid-October, the Fed’s
‘lather-rinse-repeat’ commentary on quantitative easing may have become
background music for another event that has the potential to deliver a macroeconomic
jolt: the U.S. congressional debate over the debt ceiling.
There’s some good news and there’s some bad news… The good news is the rate of
global gross domestic product (GDP) growth increased during the second quarter,
according to The Economist. Greater
economic strength in developed countries helped push the world’s GDP 2.4
percent higher during the second quarter of 2013 as compared to the second
quarter of 2012. That’s only the third time that has happened in three years. The
bad news, according to The Economist,
is:
“The world
is dangerously dependent on China… Since the beginning of 2010 it alone has
contributed over one-third of global GDP growth, with another 40% coming from
the rest of the emerging world. Weighed down by debt since the financial
crisis, the rich world’s growth has been sclerotic. Excluding America, it has
provided just 10% of global growth since 2010; America has contributed another
12.5%.”
China’s
GDP has been growing at a pretty fair pace although the rate of growth has slowed.
Forbes reported China’s GDP grew at an annualized rate of 7.5 percent during
the second quarter of 2013, falling just short of first quarter’s 7.7 percent
growth. The slowdown was expected. China is rejiggering its economy in an
effort to stimulate domestic demand and consumer spending rather than continuing
to rely on investment-driven growth.
Here’s
another tidbit to consider. Forty percent of the world’s growth has been
attributable to emerging markets (ex-China). Changing expectations for U.S.
monetary policy have interrupted the flow of capital into those markets. The Economist’s Capital Freeze Index,
which assesses the vulnerability of emerging markets to a freeze in capital
inflows, found that nine of 26 emerging countries examined are at relatively
high risk of this happening. That has the potential to affect the world’s GDP
growth rate, too.
Weekly Focus – Think About It
“Our
prime purpose in this life is to help others. And if you can't help them, at
least don't hurt them.”
--Dalai Lama, spiritual leader of Tibet
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