This week is being labelled as the 5-year anniversary of the credit crisis. In the early years, what was notable was how much of a counterweight the emerging markets were and in particular the BRIC countries (Brazil, Russian, India and China) to the slowdown seen in the US and elsewhere. So even though growth in major economies pretty much stalled between 2008 and 2010, the BRIC economies grew by more than 25%.
As the eurozone struggles with its sovereign crisis, the concern is that these economies are not able to provide the same support to global growth, at least to an equal extent. The latest data for China overnight shows inflation falling further (from 2.2% to 1.8%), industrial production softening (but still strong at 9.2% YoY) and retail sales also softening by more than expected (to 13.1% in July).
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Meanwhile, India saw some much weaker than expected production data and Brazil higher than expected inflation. Both Brazil and China should still be able to produce more stimulus measures though, as both are focused on the state of their underlying economies. But we can’t rely on them the same way we did in the early days. Risk currencies such as the Aussie were supported overnight on the hope that further stimulus measures are on the way, but as always, markets should be careful what they wish for.
Commentary
Sterling less hopeful of rate cut. The big move yesterday came on the Bank of England governor’s comments doubting the usefulness of a further rate cut in the UK from the current 0.50%. Furthermore, he also observed that: 1) the squeeze on UK consumers was easing; 2) a number of the factors which had weighed on economic performance might not continue; 3) the labour market was a positive surprise; 4) the economy was gradually healing although it would take time. According to the BoE governor, after a long period of high inflation the 2% target was now within touching distance (much to the obvious satisfaction of the MPC). All these projections are riddled with uncertainties however and for now the focus will remain on the efficacy of the latest round of bond purchases and also the newly implemented Funding for Lending scheme designed to get money into the system and lent back out to businesses and households.
Aussie still putting up a fight. There have been signs that the Australian currency has been fighting for air above the 1.05 level, but the latest jobs data have given it a further modest boost. The gain in payrolls during July was stronger than expected, with employment rising in all but two months of the year to date. This comes in the wake of a number of data releases over recent weeks which have illustrated the resilience of the Australian economy. In contrast, labour market data in New Zealand disappointed overnight, showing a stronger than expected jump in the unemployment rate (from 6.7% to 6.8%), allowing the Aussie to gain vs. the Kiwi for the 3rd consecutive trading day.
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