There’s a lot of weird stuff going on in global markets right now.
Nearly seven years after the financial crisis, with interest rates still at rock-bottom levels and global growth patchy at best, there are some major oddities. Some are recent, and some have been bubbling for a long time.
HSBC chief economist Stephen King tweeted out some of his thoughts this morning, listing what he calls the six oddities in today’s “surreal” financial markets.
Here are his tweets, in bold:
“The first oddity is a loss of control over prices. The best central bankers can do is export deflation elsewhere, triggering currency wars.”
This is a chart from Bank of England chief economist Andy Haldane, showing just how inflation is tumbling around the world. The number of countries registering deflation is climbing, along with the number registering very low (below 1%) price growth — inflation above 5% is becoming increasingly rare.
“The second oddity is negative nominal interest rates, a desperate attempt to prevent fx appreciation but in time a threat to credit growth”
This bizarre trend is most obvious in eurozone government bond yields. Much eurozone government debt is now in negative territory, and actually costing the people holding it money. Even countries that were considered default threats just three years ago are seeing incredibly low returns on their debt.
“The third oddity is the weakness of world trade growth, which may reflect more than a whiff of post-crisis protectionism.”
World trade growth accelerated significantly in the early years of the 20th century, with merchandise exports around the world more than doubling in less than a decade. But after the 2008 crash, there’s no sign of a return to a similar pace of growth. Has trade growth gone back to its previous, much slower expansion pace?
“The fourth oddity, now recognised by Fed, is the ropey nature of the US recovery, reflecting weak wage growth and energy production cuts.”
The chart below shows Bank of America’s US activity surprise index — which simply shows whether US economic data has been better or worse than was expected. Right now, the run of negative surprises has been pretty extended. The index is in the lowest territory it’s seen for five years
“The fifth oddity is believing what central banks say they’re going to do. Given BoE, SNB and now the Fed, markets need more scepticism”
In early summer in 2014, analysts and markets were undecided as to whether the Fed or Bank of England would hike interest rates first, and for a while it looked like the BoE would edge it. Since then, they have backed down considerably and pretty much nobody believes the UK will raise interest rates first. Could this sort of move be a challenge to central bank credibility?
“The sixth oddity is forecaster bias. Initial consensus forecasts for US growth since 2000 have been too high in 12 out of 15 occasions”
Forecasts for the US economy’s growth have been repeatedly too optimistic. The consensus has only been too pessimistic three times since 2000, while there have been 12 occasions on which the consensus was too optimistic. The UK is a little more balanced, but forecasts for both Japan and Germany have similarly been too rosy.