Thanks to the euro debt crisis the Federal Reserve and the Chinese government are both likely to put tightening on hold.
The Federal Reserve, which had been shrinking its balance sheet in preparation for an increase in its short-term interest rate target, now at 0% to 0.25%, at the end of 2010, added $10 billion to its balance sheet in the week that ended May 12. The additional Fed lending came as the central bank supplied more dollars to the market to meet roaring demand for dollar-denominated investments as an alternative to the tumbling euro.
The Fed’s move also reflects an increased wariness at the U.S. central bank about doing anything that would slow the U.S. recovery when it looks like global economic growth will be constrained by the euro crisis. Economists now project that Euro Zone economies will grow by just 1.05% in 2010 and by just 1.45% in 2011. Slower growth in Europe is likely to mean slower growth in U.S. exports and the last thing the Federal Reserve wants to do is raise interest rates and tighten the money supply at the same time as the euro crisis is slowing U.S. exports, and thus tip the U.S. economy back into recession.
Bloomberg’s regular poll of economists showed that as of May 10 the median forecast now calls for a very modest 0.25 percentage point increase in interest rates to 0.5% by the end of 2010. That’s down from the April 29 median forecast of a 0.75% target rate by yearend.
Speculation is increasing that the Beijing government and the People’s Bank of China are thinking the same way.
Although China’s stock market is still selling off on worries that the government will continue measures to slow speculation and control inflation, a small tide of market sentiment is starting to flow in the opposite direction.
The thinking is that China will hold off on any further big steps, such as ending the dollar peg and allowing the renminbi to appreciate, as long as turmoil in Europe threatens China’s exports to that market. Beijing is very concerned about the possibility of overshooting and taking a bigger bite out of domestic growth than the absolute minimum necessary to control inflation. With some of the surge in property prices in recent weeks possibly attributable to developers rushing to beat future restrictions on capital, the government was likely to take a breather in its tightening moves anyway to see their full effect. That inclination to caution increases with every sign that the $1 trillion rescue package hasn’t put an end to the euro crisis.
Thank you for another timely post! I was just wondering about it this morning . . .
Ben:
Jim had some words on NOK in his latest post on Apple.
jamba,
I don’t know exactly what percentage of PM’s profits are from the EU, although I know they do business there. But the falling euro will have an impact on PM’s bottom line, I just don’t know exactly how much.
bobisgreen,
I think Europe is more likely to throw themselves under the bus!
Ed,
“Throw Europe under the bus” is comical. I needed a good laugh…rainy and yucky here today! I vote “yes”…throw France under first…then Greece!
For anyone
What effect does the falling Euro have on a company like PM?
Ed,
True for some…not all. Mine seems to be caught up in the “not all”, but being spanked on the account of “some”. Ha! Just the way it works sometimes.
With domestic unemployment still in horrific territory, combined with residential and commercial real estate prices that still need substantial correction (thanks to kick the can policies that still have not addressed underlying problems, just some of the superficial symptoms), overall conditions are still profoundly deflationary. Inflation is not anywhere near the top of the list of problems with the domestic economy.
As far as China goes, as I’ve posted here before, it would be idiotic for the Chinese to remove the dollar peg and let the renmibi appreciate, considering the war chest of USD they hold. The Chinese can be called many things, but they are not idiots.
bobisgreen,
One thing I’ve noticed on the companies reporting good earnings is they are (for the most part) NOT projecting increased future earnings. In turn, the markets seem to take that as a bad sign, and sell, even when the projected earnings are higher.
Jim,
Any thoughts on Nokia’s recent management changes? Its down so much much with a sky high yield, I’m tempted to increase my position
thanks!
Your last statement, Jim, is so true…as predicted. I think Europe will be on the front burner, investors will “sell the news” here at home (markets will continue to “weeble-wobble” for a while) and China…well China will be China.
What a rotten time for companies to have good quarter earnings numbers. I have a number of positions where the news goes something like this: xyz starts company “A” at “outperform” or Company B 1Q profit soars! Outperform, “soars”…who cares…SELL! (so they say)
If inflation starts to show up in the U.S. economy while the euro is still in it’s death throes, would the Fed toss Europe under the bus?