G20 somewhat alive to risks
“The world economy stands at a crossroads. We will work to build an open world economy, reject protectionism, promote global trade and investment, ensuring broad-based public support for expanded growth in a globalized economy.”
Such said the central bankers and Finance Ministers from the world’s 20 largest economies met in Chengdu, China over the weekend as they signalled their increasing anxiety over the threats to globalisation and global cooperation, tenets that are the lifeblood of the organisation.
Policymakers also agreed that the world economy needs stimulus and not austerity although the group did not make any pledges for any form of concerted or combined effort to loosen fiscal policy.
The world’s economy is one of low growth and low yields for investors, the kind that brings stresses and strains on status quos and preconceptions. Talk however is cheap, and the promise of action even cheaper but a new philosophy of economic growth that is more inclusive is likely to be cast into Western politics.
First Brexit risks reported
The G20 remained relatively sanguine on the risks from Brexit with members said to be “well positioned to proactively address the potential economic and financial consequences.” Data released on Friday from the UK economy was not so sanguine however with the Composite PMI from the UK economy – a sentiment index taking in manufacturing, construction and services – fell to its lowest level in 7 years.
According to the survey takers, “The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to ‘Brexit’.”
Export growth did improve on the back of a weaker currency but the overall UK economic picture is one of recession at the moment and while it is still too early to forecast we are looking for Q3 GDP to fall by anywhere from 0.1-0.4%.
Sterling traded lower on the day, falling around a per cent against the dollar and 0.6% against the euro.
Japan stimulus due Friday
Dollar has taken another leg higher, mainly against the yen as we wait on news from the Bank of Japan’s latest policy meeting due Friday morning. This is the meeting that should show a hefty impulse of new stimulus and we expect a further cut into negative interest rate territory of -0.3% along with an increase in the Bank of Japan’s spending on financial assets to Y150bn.
Thoughts of helicopter money have been largely discounted and therefore a consensus reading of stimulus may promote a reaction of yen strength on Friday morning. Aggression is needed and I do not think the Bank of Japan will be aggressive enough.
Fed to signal policy change stance in August
Likewise, Wednesday’s Federal Reserve meeting is unlikely to stoke the fires of US dollar outperformance. As it stands at the moment, the Federal Reserve is very much in wait and see mode and we would expect to see calls for additional clarification on how recent data surprises are contributing to the battle for higher inflation and lower joblessness. A shift in tone towards higher rates will likely come at the Jackson Hole economic symposium on August 26th.