(Bloomberg) — The world economy is showing signs of a rapid downshift as it contends with a series of shocks — some of them self-inflicted by policymakers — increasing the likelihood of another global recession and the danger of major financial disruptions.
“We’re living through a period of elevated risk,” former US Treasury Secretary Lawrence Summers told “Wall Street Week” with David Westin on Bloomberg Television, for whom he is a paid contributor. “In the same way that people became anxious in August of 2007, I think this is a moment when there should be increased anxiety.”
At the heart of the strain: The fallout from the most aggressive hiking of interest rates since the 1980s. Having failed to foresee the surge in inflation to multi-decade highs, the Federal Reserve and most peers are now lifting rates at speed in a bid to restore price stability and their own credibility.
Evidence of the impact — and of the blow to consumers’ purchasing power from soaring prices — is mounting quickly. In the past several days, Nike Inc. reported a surging stockpile of unsold product, FedEx Corp. shocked with a warning on delivery volumes and key chipmaker South Korea saw the first drop in semiconductor output in four years as demand retreats. Apple Inc. is backing off plans to boost output of its new iPhones, Bloomberg reported.
The turn is coming even before the full thrust of monetary tightening is felt. The Fed and many counterparts are pledging to keep going with steep rate hikes as they attempt to rebuild credibility. Quantitative tightening programs, where central banks remove liquidity by shrinking bond portfolios, are also just getting going.
Inflation data showcase the need for, as Fed Vice Chair Lael Brainard put it Friday, “avoiding pulling back prematurely” on tightening. She spoke shortly after the Fed’s preferred measure of prices jumped more than forecast. Earlier, data showed euro-zone inflation has punched into double-digits.
Layered on top of continuing reverberations from the Russian invasion of Ukraine, the spreading economic gloom is sowing fear in financial markets, creating its own worrying dynamic. A rapidly appreciating dollar, supercharged by the Fed, may help cool US inflation, but it drives it up elsewhere by weakening other currencies — pressuring authorities to restrain their own economies.
“The global economy is in the eye of a new storm,” Reserve Bank of India Governor Shaktikanta Das said Friday after lifting rates again.
Prospects for a second global recession so soon after the 2020 downturn triggered by the pandemic were hardly apparent a year ago. But Europe’s Russian-induced energy crisis, and China’s deepening property slump and continued Covid-Zero approach weren’t part of the consensus outlook.
Not all is dark, with US job-market resilience a notable feature. But the plans by Facebook parent Meta Platforms Inc. for the first reduction in headcount ever illustrate how that may still change.
And Britain’s experience in recent days showcases how investors are in a mood to punish policymakers pursuing approaches deemed unsustainable. The Bank of England was forced to intervene in its bond market after the new UK government announced $45 billion of unfunded tax cuts.
What Bloomberg Economics Says…
“Forecasts of a soft landing for the global economy assume something close to perfect policy execution. The events of the last week demonstrate the reality can be very different.”
“The opportunity for further fumbles — after the UK’s fiscal fail and market meltdown — is high. And the cost, if they occur, higher.”
–Tom Orlik, chief economist.
“Markets are concerned about fiscal policies becoming even looser despite inflation, or the dollar, getting excessively strong,” said Cui Li, head of macro research at CCB International Securities Ltd.
Nike’s troubles showed how the dollar’s appreciation is causing issues not just for developing nations that issued debt in the US currency — Sri Lanka, Pakistan and Argentina are among those turning to the IMF for help — but also for American multinational companies.
The athletics-wear giant on Thursday downgraded its outlook, citing foreign-exchange effects and higher freight costs, which are a symptom of supply-chain delays and port congestion. That’s besides the need to embrace price markdowns given unsold stock. North American inventories climbed 65% in the three months through August.
Housing markets are also turning, walloped by surging mortgage rates. The US in the past week saw the first decline in home prices in a decade.
“The question is how low growth will go, and for how long it will stay down,” said S&P Global Chief Economist Paul Gruenwald.
Perhaps the biggest X-factor is the potential for financial turmoil as the dollar, which has appreciated almost 14% this year as measured by the Bloomberg Dollar Spot Index, exerts pressure across markets.
Combine that with rapid increases in borrowing costs, and it spells the potential for trouble. Summers, the ex-Treasury chief, said “You can never be certain about what the consequences of that will be.”
That has echoes of the summer of 2007, when the impact of the collapsing US housing market first began showing up in the financial system, with the closure of a number of funds and sudden liquidity shortfalls among banks. Things eventually morphed the following year into the worst financial crisis since the Great Depression.
Rising anxiety across global markets can be seen in the Bank of America Merrill Lynch GFSI Market Risk indicator, a measure of future price swings implied by options trading on equities, interest rates, currencies and commodities.
The gauge has jumped to the highest since March 2020, when markets were in full-blown pandemic panic.
Given the need to address inflation, diminished fiscal space in the wake of record spending on the pandemic, and varying priorities across major economies, the potential for joint action to address challenges may be in question.
“The incoherent macro policies within countries and absence of policy coordination across countries are both problematic,” said Cui Li at CCB.
It all makes for a potentially tension-filled gathering of global finance chiefs next week for the annual International Monetary Fund and World Bank Oct. 10-16 in Washington.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
