For a more comprehensive round up of the week, listen to Stephen’s full report here.
Over the past month or so, views in global financial markets have been very mixed, ranging from US growth being strong enough and having enough improvement in its labour market to lead the US Federal Reserve to start lifting its funds rate from zero early-to-mid 2015, to global growth potentially softening and limiting US economic growth. Of course, if the latter is true, the Federal Reserve will not be lifting interest rates this side of 2016. Changing views are promoting a sharp lift in volatility in financial markets. During September, the US 10-year Treasury yield lifted by 16 basis points (bps) to 2.50%. A third of the way through October (at last Friday’s close) the US 10 year Treasury yield was down 22bps to 2.28%. The US share market has been on a roller-coaster ride too with the S&P 500 up 3.8% in August, down by 1.6% in September and down a further 3.4% in the first third of October.
Has the global economic growth outlook really shifted as much as movements in global financial markets seem to imply? The short answer is no. Even the most recent changes to the IMF’s global economic forecasts are comparatively small – 2015 global growth revised down to 3.8% from 4.0% and – weirdly – with an upward revision to the 2015 US growth forecast to 3.1% from 3.0% previously. Importantly, even after the revisions, the IMF is still forecasting accelerating global growth from 3.3% in 2014. A first and key point is that the global economy is not facing slowing economic growth in 2015, even on the IMF’s forecasts which are widely regarded as having a more conservative bias than most.
A second important point is that economic policymakers around the world are still mostly looking at ways of supporting global growth, not suppressing it. Broadly speaking, most of the major economies still have significant excess capacity five years on from the severe economic downturn in the wake of the global financial crisis. There is no real threat of excessive inflation in most economies. In Europe and Japan the inflation problem is actually one of too little rather than too much. In our view, it is more likely than not, that some key central banks will ease policy further. It is also more likely than not that US Fed will soon provide guidance that the timeframe for lifting the funds rate is being pushed further into the future. Also, watch for China’s central bank to follow up its September easing of macro-prudential controls related to residential property loans.
More generally, when considering the stance of policymakers internationally, the current round of G20 meetings is about looking at ways of supporting stronger global growth. At some point, growth supporting policy initiatives are likely to be announced and possibly with a degree of coordination in G20.
In Australia, the RBA board met last week and made it plain that it wants to see low, stable interest rates persist for some time to come. The RBA allayed market concerns that it might react to excessive investment in residential housing or the tumbling Australian dollar. In the statement accompanying the RBA’s decision, comment on housing was limited to a brief statement of fact; that house prices had continued to rise. On the currency, the RBA indicated that the fall had not kept pace with the even sharper fall in commodity and needed to fall further to help rebalance the economy. In short, the RBA is indicating that easy policy conditions are here for some time ahead.
After the falls in share market prices over the past month or so it seems that financial markets are starting to build in a dour global growth outlook and little possibility of policy moves to improve the outlook. Those views are looking too pessimistic in our view and the market may be more vulnerable to upside surprises (which we see as far more likely to occur) than downside surprises.