G-3 Central Banks Turn Speechless!

The survey data took a turn to the worse in June. At the same time, global inflation is accelerating and many central banks appear to be on inflation-fight, at the expense of growth.

The US – A Record Breaking Country!

Private residential construction spending has now fallen for 27 consecutive months and the cumulative decline is almost 60%.Vehicle sales tumble to 15-year low on the back of sharp rise in gasoline prices. The last time vehicle sales were this low was 1993.

The US consumer has cut the spending on non-oil items by almost 40% in terms of GDP over the past two years, and the trend is clearly down every quarter. Banks are cutting leverage as aggressive as they once expanded their balance sheets. In a typical recession, the US stock market typically falls 30% or more, and we are now down almost 20%. No prize for guessing, if we are to see the markets to fall another 10%, at least from the perspective of history.

The Japan – Growing Pessimism

The equities have fallen almost steadily since early June and the downward trend in JGB yields since mid-June on receding rate hike expectations for the Japan appears to be moderating, if not stalling. Growing pessimism on the economy and corporate profit outlook, and higher inflation in coming months would constraint Bank of Japan (BoJ) policy. Preliminary June Tokyo data and companies’ price hike announcements – including electricity rate hikes and wholesale gasoline price hikes on July 1^st suggest a further pick-up in core inflation in coming months.

Core CPI inflation of 1.5% yoy in May already well above the 0.5% policy rate and close to the high end of the BoJ Policy Board’s medium term price stability concept of 0-2%. At the same time, the economy is slowing significantly on terms-of-trade losses and slower overseas demand growth. The June BoJ Tankan also confirmed a broad-based deterioration of business conditions with expectations of profit declines boding ill for capital spending and wage growth.

The European Union – Calibrating the Message

The ECB raised interest rates by 25bps to 4.25% and hinted that the move will be a one-off, even though the risk of one further rate hike to 4.5% later this year remains substantial, if the logic is to forestall rising headline inflation and inflation expectations from spilling over into wages. At one hand, the ECB continues to expect ‘on-going moderate growth’, but on the other hand, the ‘uncertainty surrounding this outlook…remains high, owing not least to the very high level of commodity prices, and downside risks prevail”.

A number of economic indicators such as the below-par purchasing managers’ indices or the contraction in real M1 money supply point to hardly any growth at all, with a risk of virtual stagnation or worse. In a nut shell – a genuine recession – although still unlikely – it cannot be fully ruled out anymore.