May 07,2018
United States:
U.S. protectionism may lead to rising global trade friction
China’s commerce ministry said on Monday U.S. unilateralism and protectionism may lead to an escalation of global trade friction and could derail the pace of global economic recovery. China does not deliberately pursue a trade surplus, the Ministry of Commerce said in a report that summarizes China’s past foreign trade situations, while calling for joint efforts between the United States and China to resolve trade disputes. Good fundamentals of China’s foreign trade remain unchanged in the long run but it also faces problems including rising costs, the ministry said.
Central Bankers Face a Crisis of Confidence as Models Fail
“As they gather in Washington for the annual meetings of the International Monetary Fund, there is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy…In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions will prove harmful.” What we find even more amazing is that despite their growing lack of faith in their models (models that the FT describes as fiendishly complicated), some central bankers still believe that forward guidance (aka simple jawboning) is an effective policy tool even when they are worried that their fiendishly complicated models are not up to scratch. Let’s just say we’re sceptical on this front. In fact, we’re pretty sceptical whenever a central banker speaks nowadays, as they are often self-serving, duplicitous and completely ignorant of the unintended consequences which we truly believe are yet to be seen from their audacious monetary policy experiments of the last decade. A number of central bankers were either speaking publicly or being interviewed by the media in Washington. Outgoing Fed vice chair Fischer said the US has room for more investment and consumption. Dallas Fed president Kaplan said that business activity was strong and the consumer was in good shape. St Louis Fed president Bullard said financial market risks not extraordinarily high at the moment…to cherry pick just a few. These comments, along with some other research on the looming pensions crisis (ie tens of trillions of dollars in off balance sheet liabilities waiting to hit in the coming decades) prompted us to do a little digging around in the US national accounts.
Europe:
Euro zone inflation slowdown adds to ECB’s headache
Euro zone inflation unexpectedly slowed last month, adding to a string of data that points to a cooling economy and possibly makes it more difficult for the European Central Bank to curb its lavish monetary stimulus later this year. Last month the rate slipped to an annual 1.2 percent, missing economists’ expectations in a Reuters poll that it would remain at the March level of 1.3 percent. The weak reading follows disappointing GDP, output, export and sentiment figures, which suggest that euro zone economic growth has peaked after a five-year run and will at best slow to a more moderate level, below optimistic forecasts at the start of the year. This comes at a sensitive time for the ECB as policymakers are debating whether to end a 2.55 trillion euro ($3.1 trillion) bond buying scheme this year, satisfied that healthy growth will eventually raise inflation back to its target of almost 2 percent. Introduced more than three years ago to boost flagging growth and inflation, the ECB’s bond purchases helped to revive the economy with a flood of cheap cash. The program is due to run out at the end of September and policymakers need to decide over the summer whether to shut it down after several extensions. But inflation has failed to rise for years according to expectations and in April it also missed the ECB’s prediction of a rate “around” 1.5 percent for the rest of the year.
Asia:
China’s trade imbalance with U.S. a long-term problem, says central bank governor
China’s “huge” trade imbalance with the United States is a structural and long-term problem and should be viewed with rationality, the Chinese central bank governor was quoted as saying by financial magazine Caixin. Yi Gang, appointed to head the People’s Bank of China (PBOC) in March, also called for concerted efforts from the United States and China to resolve the trade dispute, Caixin said in a report published late on Friday. The comments came after an inconclusive two-day meeting between Chinese and U.S. top level officials in Beijing amid escalating tit-for-tat tariff threats between the world’s two biggest economies. Washington demanded that China reduce its trade surplus with the United States by at least $200 billion by the end of 2020, according to sources. China had a record U.S. goods trade surplus of $375 billion in 2017. China’s opening up will not be affected by the current trade frictions with the United States, Yi said. Yi only weighed in briefly on the U.S.-China trade issue in an extensive interview with Caixin in Washington in late April. The PBOC governor reiterated China’s existing stance on a variety of matters including monetary policy, the opening up of its economy, the yuan and the country’s deleveraging efforts. He reiterated China’s commitment to its prudent and neutral monetary policy and its focus on stabilizing its macro leverage ratio and reducing financial risks. On the currency front, Yi said that the PBOC has not intervened in the foreign exchange market for almost a year now, and authorities are committed to market-based foreign exchange rate reform.