Economic Commentaries

Entries for May 2013


Since the beginning of this year global equity markets have risen steadily while sovereign fixed income markets have held roughly steady. This is despite the fact that if anything global economic growth is shaping up as weaker than generally expected while inflation is collapsing worldwide.

The reality of subdued growth and negligible inflation has led global Central Banks to aggressively ease credit, flooding the world with liquidity. We think the out performance of equities reflects this liquidity infusion and a seeming blind faith on the part of investors that central banks will indeed succeed in reviving the global economy. This faith is reflected in consensus economic forecasts which are for a meaningful reacceleration of economic growth in the year's second half.

Whether or not this faith is justified or the piper will be paid with a sharp equity correction and interest rate drop remains to be seen. But no matter the outcome at least one thing seems pretty certain to us and that is that inflation is cooked and commodity markets will continue losing appeal.

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Posted in: General

Belatedly ECB head Mario Draghi reduced the benchmark interest rate in May and allowed for even more action if needed, including taking the deposit rate below zero and perhaps buying low quality loans directly from European banks. Meanwhile, at its FOMC meeting Federal Reserve officials suggested a flexible approach to its asset purchase program, allowing that it could even increase the size of its purchases if deemed necessary.

Other Central Banks have since followed the lead of the U.S. and Europe with their stimuli of lowering interest rates. And of course the Bank of Japan is sticking with its own aggressive easing program. Equity markets worldwide have been cheering this latest liquidity injection while bond markets hang tough in the face of decreased sovereign debt supply and diminishing inflation expectations.

Why have Central Banks become bolder, especially in the face of an improved labor market in the U.S., evidence of more lenient lending standards among U.S. banks, and even a smattering of some relatively upbeat economic data reports in Asia and Europe? One reason is that labor markets worldwide remain fundamentally weak. While the jobless rate has fallen to 7.5% in the U.S. a portion of this can be attributed to increased part time work and decreased labor force participation. Euro zone unemployment is at a new record high above 13% and in the periphery it is twice this level.

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Posted in: General