Fed Reducing Planned Number of Rate Hikes – well that didn’t take long. After a volatile start to the year, as global growth questions mounted, the Federal Reserve Wednesday decided to pare back its schedule for raising interest rates this year. Not coincidentally, the S&P 500 touched its highest mark of the year just following the announcement in yet another testament to the market’s short-term obsession with interest rates.
The Fed held rates between 0.25% – 0.50% and cut its projection for rate hikes this year from four to two. The Federal Open Markets Committee (FOMC) pointed to “global economic and financial developments” as the inspiration stating, essentially, that lower growth expectations should keep inflation in check for the remainder of 2016. The announcement sent the dollar on a mini downward tailspin overnight, though it still remains strong relative to other currencies.
Japan Exports Decline Continues – in another sign that the Japanese economy simply can’t seem to drive sustainable growth, exports fell for the fifth consecutive month through February. Exports are Japan’s bread and butter in an economy where the savings rate is high and consumers don’t spend as large a percentage of discretionary income as Americans. Faltering exports suggest that the “Rising Sun” could endure its fourth recession in five years; another sign that Bank of Japan governor Kuroda’s monetary policy experiment is not effective (inflation also remains essentially at zero). With rapidly shifting demographics in the country (the population is aging quickly) the secular view of Japan’s market and economy is largely negative. February exports fell 4% year over year as the Lunar New Year ended and China resumed buying, following a 12.9% decline in January. It’s better than January, but negative is still negative.
Is China Done with Monetary Easing For Now? – we’ve learned many times over that you can’t really trust anything the Chinese government says when it comes to economic policy. The surprise currency devaluations twice last August and the “circuit breaker” fiasco in the domestic equities markets are two recent examples of misguided and “we’ll do whatever we want when we want to” policy. So, China’s recent announcement that they are done for now with excessive stimulus to bolster growth, but that they will keep a flexible stance in the event of an economic shock, is news until it isn’t. The Governor of the People’s Bank of China (PBOC) said that “current monetary policy is prudent with a slight loosening bias,” and that should be enough in the near-term to keep China chugging along. The upside here is that by tempering the markets expectations, a surprise rate cut could give global stocks a boost (unless that rate cut follows bad economic data and therefore looks desperate). The PBOC has had perception issues many times in the past. Overall, over the last year and a half or so, the PBOC cut interest rates six times since November 2014 and has also reduced the amount of cash that commercial lenders must hold as reserves.
Brazilians Fed Up with Lack of Leadership – last Sunday saw perhaps the biggest demonstration ever in Brazil’s long history as protestors marched through cities across the country to protest political corruption (ongoing Petrobras scandal amongst other allegations), a weak economy, high inflation and poor leadership from current President Dilma Rousseff. Citizens want her impeached and her recent move to appoint former president Luiz Inacio Lula da Silva as chief of staff only emboldens the movement. Da Silva was recently indicted for corruption charges himself and his appointment as Chief of Staff seems a fairly obvious ploy to grant him legal protections. Brazil’s economy, meanwhile, is suffering on the back of the global commodity rout coupled with high inflation. Even with the Olympics coming, consider steering clear.
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