| Global economy awaits Fed policy amid slowdown |
LONDON The global economy is moving into a good old fashioned slowdown with the developed world’s policy options limited and investors nervous, putting the spotlight firmly on US Federal Reserve Chairman Ben Bernanke in the coming week to point the way ahead.
Bernanke delivers his twice yearly update to lawmakers on Tuesday and Wednesday, beginning a day after the International Monetary Fund is expected to cut its global growth forecast when it releases the latest World Economic Outlook.
“I think investors are really going to be looking for what is it the Fed is willing to do, or can do, to try and stimulate growth,” Joseph Tanious, global market strategist at JP Morgan Asset Management said.
“But at the end of the day my opinion is that there is nothing it can do,” Tanious said.
Business sentiment indexes in Europe, slower growth in China and a run of weak US economic numbers have confirmed a loss of momentum in the world economy over the past two months.
Policy makers at central banks in Europe, Britain and Japan have all recently met and opted to stay on an easing path, while their governments all face fiscal constraints, leaving investors firmly in a defensive mood.
World equities are down about 2 per cent this month, but are still up 2.1 per cent for the year. While Citibank’s World Broad Investment-Grade (WorldBIG) Bond Index is up 3.6 per cent for the year to date, having gained around 1 per cent so far this month.
The main questions most investors want Bernanke to answer are how close is the central bank to launching a third round of large-scale asset purchases (QE3), and what kind of other tools might it consider using.
The coming week see updates on the US inflation picture as well as data on housing starts and industrial production which should highlight the ongoing slowdown in the economy, adding to recent weak jobs numbers in paving the way for more easing .
Michael Metcalfe, head of macro strategy at State Street Global Advisers, believes the potential for a rapid fall in inflation below the Fed’s current target has kept the prospect of further easing alive.
Metcalfe said an analysis of online prices compiled by PriceStats pointed to an inflation rate running at around 1.3 per cent compared to the Fed’s 2 per cent target.
“This is also indicative of much lower level of economic activity in the economy and a rising deflation risk,” he said.
Reuters
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