The latest inflation figures from the Continent show consumer prices dropped 0.2% in February. That was the most deeply negative reading since September, and far worse than the flat reading economists expected.
Even if you strip out food and energy, you get a core inflation reading of just 0.7%. That was down from 1% a month earlier, and the weakest since April 2015.
That clearly confirms the utter failure of the European Central Bank’s (ECB) actions to date. Inflation hasn’t reached the bank’s 2% target for three full years. So what are policymakers going to do when they meet next on March 10? More of the same!
|The ECB’s actions to date have brought little success.|
The top minds on Wall Street, and in Europe’s financial capitals, now expect the ECB to add another 20 billion euros a month to its 60 billion-per-month QE program. It may also cut its deposit rate further into negative territory, perhaps as much as 20 basis points from the current negative-0.3%. I wouldn’t be surprised to see additional monetary policy “spaghetti” to get thrown against the wall, such as a change in the mix of assets the ECB can buy.
The funny thing is, policymakers from all over Europe and the U.S. just admitted in Shanghai that monetary policy is no longer working. They said negative interest rates in particular are actually making things worse. For its part, the G-20 statement released on Saturday included platitudes about avoiding currency devaluation and about enacting fiscal stimulus. But it contained no indication whatsoever of massive deficit-funded, concrete spending measures.
Yet the ECB seems poised to press on anyway. And it’s doing so at a time where our own data here in the U.S. isn’t very inspiring. An index that tracks pending sales of existing homes dropped a worse-than-expected 2.5% in January. That was the biggest decline since December 2013.
|“Yet the ECB seems poised to press on anyway.”|
The Chicago PMI index of regional manufacturing activity also tanked to 47.6 in February from 55.6 in January. That missed the 52 estimate by a mile. A sub-index that tracks hiring dropped to its lowest level since November 2009.
Bottom line: I’d love to be more positive here. But the U.S. economic data is lackluster. The European deflation monster is getting more ferocious by the day. And the policy measures that will supposedly help “fix” them are failing miserably. That doesn’t sound like a recipe for big stock market gains to me.
So what do you think? What will the ECB do in a few days, and what impact will it have (if any) on stocks? Do you think the U.S. economy is going to weaken from here? If so, will that weakness be led by housing? Manufacturing? Some other sector or group of stocks? Let me know what you’re thinking below.
What, if anything, can or should be done to revive global growth? That was the subject of several of your posts Friday and over the weekend.
Reader Thomas D.J. said a slowdown is already baked in the cake, regardless of what policymakers do. His take: “Inventories are increasing. So just when business should be starting to fill shelves with new products, there will be no shelves to put them on. Prices will crash in the next quarter.”
Reader Paranumre shared a similar view: “You ask: ‘What CAN they do to fight this slowdown?’ ” Nothing that will be effective. But you can bet they will continue to do more that is destructive.”
Reader Frebon suggested a few approaches that might work better, saying: “There is something they can do, but it doesn’t take economic principals into account — just good old common sense. The Fed should raise rates and put money into the hands of the middle-class who will actually spend it. Nothing they have done for eight years has increased demand. It has only served to finance stock buybacks and overseas investments.
“Give a one-time tax break of 10% to only foreign-held money and bring those trillions back here. Trillions more will come as money seeks higher returns and the Saudis, the Chinese, and the Japanese will be forced to liquidate their reserve currencies.”
Reader Gregory H. also said monetary policy is failing, and that other measures are required. His take: “Easy money won’t have much influence over the direction the U.S. economy heads. That should be obvious after 8+ years of interest rates hovering around zero and the result being tepid, lackluster GDP growth.
“Ignoring non-U.S. economies for a moment, what would spark U.S. GDP growth are a reduction in regulations, an easing of costs associated with hiring new employees, and creating an atmosphere of potential profitability that would encourage business owners, and potential owners, to invest in new businesses and/or grow their existing business. Existing tax rates are simply too high and discourage risk taking, while rules and regulations make the cost of doing business exceedingly uncertain.”
Reader Jim W. added: “There is nothing the G-20, the central banks, or any government can do that can fix the economy. After every downturn we never try to fix the real problems. Rather, we try to fix the symptoms with low interest rates and liquidity. This just makes things worse and creates even more bubbles, so that the next economic downturn is much worse than the last one.”
Bottom line: Many of you think monetary policy is useless at this point, and fiscal policy is probably not going to be all that effective either. A better approach would be to make it cheaper to run or start a business, and to find ways to bring offshore funds back here to the U.S.
Whether that sounds about right to you … or not … I’d love to hear from you here at the Money and Markets website. So add your comments when you have time.
Speaking of central banks, the People’s Bank of China cut the bank reserve requirement by another 0.5 percentage points, or 50 basis points, overnight. The move takes effect tomorrow, and it will theoretically free up a bit more room for Chinese banks to lend.
Trading firms and energy companies have long stored excess oil in offshore tankers or in tanker farms on land. Now that many of those storage places are almost topped off, some firms are looking at “rolling storage” – using excess oil railcars to store excess oil in, according to the Wall Street Journal.
Finally, the 88th Academy Awards show in Hollywood last night resulted in a Best Picture victory for “Spotlight.” The Best Actor award went to Leonardo DiCaprio for “The Revenant,” whose director Alejandro Inarritu took home the Oscar for Best Director. Brie Larson won Best Actress for her performance in the movie “Room.”
Will a fresh round of deflationary data from Europe result in even more of the same monetary medicine that hasn’t worked to date? Will China’s reserve-ratio cut help the economy there? Any thoughts on using railcars to store extra oil, or on this year’s slate of Oscar winners? Hit up the comment section below and share them when you have a minute.
Until next time,
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