Little Settled after a Newsworthy Week

February 28, 2013

Net dollar movements in the Thursday-to-Thursday week since February 21st were insignificant is size despite a number of notable revelations during the period.

Japanese Prime Minister Abe’s nominees for a new leadership team at the central bank were announced.  This dovish team will serve for the next five years with the mission of ending deflation by promoting faster real economic growth, speedier domestic credit expansion, and a depreciated exchange rate.

Less strained global financial market conditions has improved sentiment but not so far delivered better real economic growth.  Activity in North America and Europe sputtered in the fourth quarter, and more recent figures point at best to only gradual improvement.

U.S. GDP growth last quarter was revised upward by less than expected, reaching a mere 0.1%.  The biggest positive surprise in this young year has come from housing.  Although the Fed has become more divided internally over the cost-benefit trade-off of present quantitative easing, Chairman Bernanke oversees the dovish majority, doesn’t doubt the present course, and has the educational credentials, unlike many of the other FOMC members, to know what the U.S. economy needs policy-wise to minimize downside risks.

Europe is more polarized than ever.  France, which had been an engine of regional demand growth, has joined the group of troubled peripherals.  Italy’s fractured, inconclusive election creates new uncertainties for Euroland’s third largest economy.  The only certainty now is a long period of hard negotiations to form a weak government.  Greece continues to mimic the intensity of the Great Depression in its downturn without an end.

Some banks in Europe have much healthier balance sheets, but a majority remain very fragile.  The continuing weakness of private sector credit growth and lending leaves open the possibility that the ECB may yet cut interest rates further or undertake other unconventional steps.

The devel0ping economies are not a homogenious group, but a large majority are experiencing weaker activity than their long-term averages.  China reported a lower factory purchasing managers index.

Disinflationary forces are far more prevalent than inflation.  Many countries reported lessening inflation this week.  It’s been many years since a meltdown of global financial markets plunged the world into its severest downturn since the 1930s, which in turn lifted fiscal deficits sharply.  Warnings about soaring long-term interest rates continue to be miles wide of the mark.  The 10-year Japanese JGB yield slipped under 0.70% this week for the first time in a decade.

Looking forward, markets will need to deal with the impact of a U.S. sequestration, a new leadership team at the Bank of Japan, and frustratingly slow growth in Europe.  This will be a fertile backdrop for widespread efforts to achieve a weaker currency.  This is a competitive sport and threatens the code of cooperation espoused by the Group of Seven and Group of Twenty in principle.  Historically, Japan, the United States, and Europe have been more successful at this tactic than Continental Europe and policymakers in commodity-sensitive economies.  It seems that the Abe government would like to see the yen closer to 100 per dollar than 90, and the Obama administration prefers that the euro trade above $1.30 than below.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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