Central Bankers’ Heads, and Rates, Spin on Fresh Global Threats
Central Bankers’ Heads, and Rates, Spin on Fresh Global Threats
(Bloomberg) --
The specters of a currency war and global recession re-emerged in full force this week, with central bankers struggling to keep up on the defense while other economic risks also rise.
Here’s our weekly wrap of what’s going on in the world economy.
Unlucky Number 7
The Chinese yuan burst through the infamous ‘7’ level to start the week on rocky footing. The currency slump spread through regional markets and prompted an equally investor-jolting response from the U.S., with China garnering the largely symbolic -- though rarely deployed -- “currency manipulator” tag. Both leaders are making big bets in the trade war that risk backfire, our Beijing- and Washington-based reporters write.
Things calmed a bit Tuesday with the yuan’s rebound, but damage was done, with investors betting “it could get a lot worse.” Prospects for a currency war left policy makers all over on edge, including a tortured Haruhiko Kuroda who watched a yen rally push his inflation goal further away.
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Surprise Party
The currency kerfuffle was pile-on for an already flailing global economy. U.S. data are joining the fray, with services showing the slowest growth since 2016 and the yield curve flashing its brightest U.S. recession warning since 2007. It’s no wonder there’s louder talk of a global recession.
Central bankers surely had their work cut out for them, and Wednesday brought a round of surprises in the Asia-Pacific, with New Zealand and India slashing interest rates by more than expected and Thailand shocking with its own easing. The Philippines followed with a cut of its own on Thursday. Serbia unexpectedly cut its key interest rate for a second straight month. And while Australia held, the central bank said it’s prepared to cut rates again.
While growth took center-stage in policy makers’ decisions this week, some economists wondered whether the new challenges posed around currency and U.S.-China drama might have prompted more aggressive dovish action now, before decisions are set to only get more complicated in the months ahead.
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Where From Here
The daily firefighting is aggravating worries that central bankers will have little left to put out the bigger blazes when they inevitably arrive. Even rock-star economies Australia and New Zealand are now faced with very little room to cut rates further. Alternatively, Jerome Powell is getting blowback for implying that the U.S. only needs a modest easing dose.
Trillions of dollars in foreign reserves that were meant to be a bulwark against currency fluctuations are now being seen as less potent in these unconventional times. Perhaps those idle cash piles are an opportunity cost.
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Middle Burner
As the trade war and its victims steal the spotlight, the global economy has other trouble spots that threaten to tip into crisis. The greater chance of a no-deal Brexit looms for U.K. officials who would have little historical precedent to defend the economy. Second-quarter GDP data on Friday gave them a taste of what could come. Inflation woes haunt Zimbabwe, which has blacked out its data, and Venezuela, where the outlook for skyrocketing prices is made more complicated by fresh U.S. sanctions. Meanwhile, a seven-month low in oil is re-igniting geopolitical tensions.
Weekend Reading
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- Inside New York Fed, Abrupt Ousters Shake Staff and Sink Morale
- Putin’s Pledge to Ditch the Dollar Is Slowly Becoming a Reality
- CHINA INSIGHT: Yuan Drop Unlocks PBOC From ‘Impossible Trinity’
- The Dollar, the Euro, the Yen -- and Now the West African Eco
- ECB’s Sub-Zero Headache Might Require Range of Fixes to Be Fair
Chart of the Week
To contact the reporter on this story: Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net
To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Zoe Schneeweiss
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