No help for frightened markets from the US Federal Reserve this morning, despite a flood of news overnight and yesterday strongly suggesting the pace of global economic activity continues to slow, especially in Asia. For Australia, that slowdown is of far greater importance than the Fed’s latest decision to sit tight and do nothing other than acknowledge that the performance of the US economy had worsened in the past six weeks.
Asia’s slowing was highlighted in the latest surveys of manufacturing activity and in an 8.8% drop in exports last month from South Korea and by the surprise contraction in the Taiwanese economy in the June quarter. Asia contains our biggest markets for commodities such as iron ore, coal, LNG and other metals. The news wasn’t encouraging, although unlike Europe, the region is still growing.
Growth in the likes of China, South Korea and Taiwan has supported the region and much of the rest of the world in the past couple of years, so the slowing pace of activity, so the news from the surveys wasn’t good. In fact Markit, the company that conducts the surveys, noted in its commentary that the surveys for July showed the “second-steepest downturn in Asian manufacturing for over three years”.
“Companies reported that conditions were deteriorating at a rate not seen since April 2009 with the sole exception of the downturn seen last November, with lower PMI reading in Vietnam, South Korea and India. Only the Indian and Indonesian PMIs signalled an improvement in business conditions, but even then the rates of improvement were only modest, with the former showing growth since last November.”
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For Australia, the major factor behind the slide wasn’t good news: the surveys showed weak to falling export orders in our biggest export markets for resources.
So the disappointment from scared markets and investors at the Fed’s decision to sit pat, despite the clear darkening in the US growth outlook, won’t have the same impact in Australia as it will in the US. Markets eased lower as they await the European central bank tonight and whether it will ride to the rescue, as its President Mario Draghi seemed to promise it would last week. After the non-decision from the Fed, more investors seem cautious about that happening.
US markets had traded cautiously ahead of the Fed statement, staying slightly in positive territory until the news broke of no change, and down shares went. While the chances of a new round of easing had not been high, markets had expected the Fed to push out its pledge to hold its benchmark federal funds rate exceptionally low to late 2015. Instead the Fed repeated that it would likely hold that rate steady until late 2014 and left unchanged the federal funds rate target at zero to 0.25%, the level it has been at since December 2008.
The Fed did say in its statement that “it will provide additional accommodation as needed,” a slightly stronger promise that in June, when it said that it was “prepared to take action as appropriate”. Desperate investors took that to mean the central bank will produce a new asset purchase program, including the buying of mortgage-backed securities, at its next policy meeting in September. They look to weak jobs reports for July on Friday, and August in a month, for help in convincing the Fed to ease further. But if the ECB comes up with a new round of support, the Fed could do nothing, again.
Last month, the Fed extended its Operation Twist program until the end of the year. The Fed is selling short-term government securities and buying longer-term Treasuries in a bid to reduce long-term interest rates. That is happening, with US banks reporting a surge in refinancings (which are boosting profits), while home sales are rising and new home construction has risen sharply. But that’s not enough to offset the slide in activity elsewhere in the economy.
The central bank downgraded its view on the US economy, saying that economic activity had “decelerated somewhat over the first half of the year”. Previously the Fed had said that the economy had been expanding “moderately.” That supports the flow of data in the past month, including the first estimate of second-quarter growth at an annual 1.5% against the 2% rate in the first quarter. As well the Fed said US unemployment is “elevated”, consumer spending, “slowing” and the housing market is “depressed,” despite some recent improvement.
The Fed’s announcement came at the end of a 24-hour period when those monthly surveys of manufacturing activity across the globe showed a widespread slide towards and into contraction. While, in the cases of China and the US, the reports showed sluggish growth, but at lower levels, the news from Europe and the UK was again gloomy, while the pace in the Australian manufacturing sector fell to recession-like levels. But that is not indicative of the wider economy with the resources investment boom continuing to keep the economy afloat.
In the US, the index measuring manufacturing activity stayed under the 50 level (which separates contraction from expansion) for a second month, the first time this has happened since the 2008-09 recession. Exports and employment fell, but new orders perked up, but remained well under 50 and in contraction.
Across the Atlantic, manufacturing activity in the 17-nation eurozone last month contracted at its fastest pace in more than three years. The Markit eurozone purchasing managers’ index fell to a 37-month low of 44.0, down from 45.1 in June and slightly below a preliminary estimate of 44.1. Markit noted widespread weakness, with almost all national PMIs below the 50 level. Ireland went against the trend, rising to a 15-month high at 53.9. “Output fell at the fastest rate since mid-2009, consistent with the official measure of production falling at a quarterly rate in excess of 1%. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter,” according to Chris Williamson, chief economist at Markit.
In Britain, the contraction in manufacturing activity accelerated last month. The Markit/CIPS purchasing managers’ index for the sector dropped to 45.4 versus a revised reading of 48.4 in June. “A perfect storm of wet weather and weak confidence in the UK has combined with global economic drift to engulf the manufacturing sector in July. While the eurozone has continued to be the major factor, declines in business from Asia have dashed hopes of a quicker recovery,” David Noble, chief executive of the Chartered Institute of Purchasing and Supply said in a statement. The UK economy contracted by a larger than expected 0.7% in the second quarter, according to a preliminary estimate last week. That fall in manufacturing activity in July throws into doubt claims the economy will return to positive, but weak growth this quarter.