There’s much to ponder about the global economy, following the Fed’s latest decision to leave interest rates on hold. Associated Fed commentary took on an even more cautious than it did at the end of last year, and looking around the reasons aren’t hard to find.
The US economy continues strong enough, but in the wider world the picture is less rosy. The German economy continues to send out mixed signals, the Italian economy is now officially in recession, the British economy is likely to be pitched into months if not years of chaos within the next month, and the Chinese economy is slowing too.
Indeed, the latest data from China, the Caixin PMI survey, which was released the day after the Fed decision, has shown that Chinese manufacturing activity is at its lowest level for three years.
Overall, the broad consensus is that China’s economic growth will ring in at 6% this year, but it’s not hard to find pessimists who think it will be lower.
Either way, domestic demand can only insulate the US from the rest of the world for so long, and it’s the prospect of a hit on exports, overseas investments and global financial flows generally that is giving the Fed pause.
This new caution, somewhat paradoxically, has given a certain amount of cheer to equity markets. If the coupon on cash stays low, equity yields look comparably more attractive, so investors pile in and push up prices.
The corresponding effect on the US dollar is to render it weaker against the standard basket of foreign currencies, something Donald Trump has been desirous of in his efforts to creative a favourable environment for exports, and the pricing of those exports. But of course if overseas demand collapses, a few points this or that way on the dollar won’t end up making much difference.
Already we’re seeing the effects of all this on the commodity markets.
In the first place, gold has gone through the US$1,300 mark and looks in no mood to give up that ground. Analysts have suddenly started talking about the next upward inflexion points for gold, rather than the refrain of downside risk that we’d have for a couple of years now.
Silver too has been moving upwards, stimulated additionally by a new narrative that supply may become constrained. Here, the thinking is that large scale miners have been focussing much more on gold in recent years, because of the greater margins on offer, and that major new silver projects are now becoming thin on the ground. At the same time demand for use in industrial applications continues to rise.
Copper’s ticked up a bit in recent weeks, as the heavy selling at the end of December has now abated, but it’s still down by around 10% on this time last year. Zinc’s down by 25% on a year ago, while nickel’s down by around 8%.
It could be that the recent upticks in all these base metals represent the start of a broader trend of rising prices. But given the uncertain economic backdrop that seems unlikely.
Nor is it simply a case of dollar weakness causing all boats to rise. The index known as the DXY, which measures the dollar against a basket of currencies, registered a decline in the dollar’s value of slightly less that US2cents from its December high.
Gold, by contrast is up by around 8% over the same period, and is showing every inclination of going higher.
And against this backdrop of weakening sentiment the US-China trade negotiations drag on, and optimism about the outcome waxes and wanes depending on who in particular is being quoted in the press, and what kind of pressure they are attempting to bring to bear.
Expect a successful outcome of these talks to deliver a significant short-term fillip to markets, including to commodity prices. But in the longer-term, the wider context of the slowing global economy will continue to bear down on prices.
There’s no recession on the horizon yet. But just don’t expect the good times to start rolling either. For the US, this may be as good as it gets. For the rest of the world, it looks as though this economic cycle has already peaked.