Hopes for a global economic pick-up are being dashed by a range of market movements, most particularly the fall in share prices, the drop in bond yields back towards record lows and the pull-back in commodity prices.
In almost all instances where global economic growth is accelerating or downright strong, share prices, bond yields and commodity prices move higher. When markets start moving in the opposite direction, particularly in unison, there are reasons to be concerned. This uniform negativity in market trends spells problems ahead.
Global stock markets weakened again overnight and into this morning. In the past five weeks or so, US stocks have fallen by over 7 per cent on the back on softer economic data, concerns about how the fiscal cliff will be negotiated and a mix of eurozone and geopolitical tensions. It is a similar story elsewhere – in recent weeks, UK and German stocks have fallen over 4 per cent, Japanese stocks are 6 per cent weaker and the Chinese stock market is going sideways having dropped by more than 15 per cent from May.
This momentum is not encouraging.
While share prices have been falling, so too have commodity prices. The broadly based Thomson Reuters/Jeffries CRB index of commodity prices has fallen 9 per cent since the middle of September. This again is not an encouraging sign for global growth with the price falls concentrated in energy (oil in particular) and industrial metals. The price of these commodities rarely weakens so sharply when the global economy is in an upswing.
The downward momentum on commodity prices brings into question a raft of recent data from China, which at face value pointed to a pick-up in activity in October. There is acute doubt about the reliability of the Chinese economic statistics at the best of times, but it is particularly so now when the "better” news has coincided with weaker commodity markets.
The problems in the US were also brought into focus with the release of the minutes from the last meeting of the US Federal Open Markets Committee. These make for sober reading for those expecting or even hoping for a US recovery. The minutes revealed a push for further quantitative easing after the current "operation twist” finishes at year end. This would be an additional easing strategy over and above the recently announced open-ended purchase of mortgage backed securities and must reflect nervousness from the Fed about the structure of banking in particular and the economy more generally.
The FOMC minutes emphasised risks to the US from a weak global economy, domestic fiscal policy and an escalation of market problems in Europe. Even the recent run of more favourable labour market data was questioned, with the minutes noting that "other indicators of labour market conditions ... did not show decided improvement."
The FOMC concluded by saying "Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year." This is not an optimistic outlook from the Fed.
This wall of worry is showing up all too clearly in the biggest financial market globally – that of government bonds. Ten-year government bond yields were edging higher a couple of months ago as the hints of optimism crept into market thinking. Those trends have now been reversed. When one considers current 10-year yields of 1.59 per cent in the US, 0.74 per cent in Japan, 1.34 per cent in Germany and even 1.75 per cent in the UK, it is not a scenario where inflation risks and a strong upswing in activity is evident. It is hard to fathom that just five years ago, the US 10-year yield was around 5 per cent.
The bond market is shouting out that the global economy is still in the doldrums, that disinflation pressures are intensifying and that 2013 is likely to be another year of uncomfortable economic challenges.
These recent market trends and signs of concern from the Fed about the US economy crush the optimism of August and September when the US Fed, the European Central Bank, the Bank of England and the Bank of Japan, among others, expanded their unconventional monetary policy and gave pledges to "do whatever it takes” to spark a sustained upswing.
It appears that the pledge is getting more and more costly as more and more needs to be done to try to get he global economy on an even keel.