Ouch! Now that hurt, didn’t it?
Of course it did. Wall Street has played its role according to script the day after the US Federal Reserve announced that it was “reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities”.
Investors set themselves up for a fall by expecting more stimulus from the Fed – and a fall they got.
The S&P 500 index dropped by 2.8 per cent, the Dow fell by 2.5 per cent and the Nasdaq tumbled by 3 per cent.
Just as I feared, equity markets would not be happy little vegemites whatever the Federal Open Market Committee (FOMC) decides to do. Investors will be disappointed if the FOMC failed to announce another quantitative easing (QE2). Investors will be disappointed if it does because the Fed’s announcement of more stimulus measures confirmed their worst fears – the sky is falling!
And so it came to pass. A day after the Fed pandered to the market’s whims, the joke was on the market. As I expected, they sold off instead of rejoicing. Double-dip, here we come!
“I started a joke, which started the whole world crying, but I didn't see that the joke was on me.” (Bee Gees)
Now every other indicator is being given a negative spin.
China. New lending amounted to only 533 billion yuan in July, down from 603 billion yuan in the previous month and lower than market expectations of 600 billion. Retail sales expanded by “only” 17.9 per cent in the year to July after an 18.3 per cent surge in June. Industrial production growth “slowed” to 13.4 per cent in the month from 13.7 per cent in the year to June.
Absent the previous day’s Fed action, this would be interpreted as, “this is exactly what the doctor ordered”. But not now. Now we’re in big trouble.
No Goldilocks. It’s just outright laughable that China can’t seem to please the financial markets. It’s either too hot or too cold. They don’t like China growing fast because it threatens an overheating in the economy. They don’t like China slowing either. Not good for global growth. Can’t win.
United Kingdom. In its quarterly inflation report, the Bank of England (BOE) said that the country’s economic recovery would be slower than previously expected. The BOE now expects growth to peak at 3 per cent instead of 3.6 per cent.
Absent the previous day’s Fed action, this would not be any cause for concern. Growth of 3 per cent is still far, far, far away from a double-dip and heaps better than the seven straight quarters of year-on-year contraction the economy experienced from the third quarter of 2008 to the first three months of this year. At its deepest, the UK economy contracted by 5.9 per cent in the year to the June 2009 quarter.
United States. America’s trade deficit widened to US$49.9 billion in June from US$42 billion in May.
Absent the previous day’s Fed action, investors would be looking at the details of the US external account and find that Americans are buying more imported goods. Imports increased by 3 per cent in the month. Consumers are consuming.
The Fed’s action undid the optimism that had slowly been rebuilt over the past few weeks.
“Sometimes the highest form of action is inaction.” (Jerry Brown)
