Fed officials favor QE3; Asian data signal drop in global demand

BEIJING/TOKYO Mon Jul 9, 2012 6:31am EDT

A truck is driven down a road at a yard where cars are parked before being exported at a port in Incheon, west of Seoul June 17, 2012. REUTERS/Choi Dae-woong

A truck is driven down a road at a yard where cars are parked before being exported at a port in Incheon, west of Seoul June 17, 2012.

Credit: Reuters/Choi Dae-woong

Related Topics

BEIJING/TOKYO (Reuters) - Asia's biggest exporters showed further signs of slowing down in data published on Monday, signaling a fresh slide in global demand, as two top U.S. Federal Reserve officials said they favored easing monetary policy to boost growth.

Japan's core machinery orders in May plunged 14.8 percent from April, with the key gauge of capital spending sinking far below analyst expectations of a 3.3 percent decline. That raised the risk that growth momentum in the world's No. 3 economy will stall if firms start to scale back investment.

Meanwhile consumer inflation in China, the world's second biggest economy, eased more than expected in June, with producer prices in outright deflation for a fourth month.

The numbers signal that demand for goods from the nation's vast factory sector - especially from foreign customers - is declining as the global economy weakens.

Exports from Taiwan, one of the world's largest producers of electronics, declined in annual terms for a fourth straight month in June against market expectations of a modest rise. Taiwanese firms make the majority of Apple gadgets as well as smartphones for various brands, and the dip reflects falling global demand for such consumer products.

Europe's biggest economy, Germany, announced that imports and exports rose more in May than expected, but economists said it was a rebound from weak figures in April.

The data points in Asia underlined a downbeat assessment of growth prospects in the world's biggest economy by Boston Federal Reserve President Eric Rosengren in a speech in the Thai capital Bangkok on Monday.

"My pessimism is rooted in an expectation of weakness in investment, net exports, and government spending," including "concerns about economic and financial conditions in Europe," said Rosengren, who described himself as more pessimistic than policy-setting colleagues on the Federal Open Market Committee (FOMC).

He's not alone in feeling grim about near-term U.S. economic prospects, with Wall Street economists more convinced than ever that the Fed will embark on a so-called QE3 program - a third round of quantitative easing via large-scale bond purchases.

A Reuters poll on Friday revealed that primary dealers, the large financial institutions that deal directly with the Fed, expect a 70 percent chance of the $2.3 trillion QE program being expanded.

The poll was conducted after the U.S. Labor Department reported that employers created only 80,000 jobs in June, far fewer than needed to bring down the 8.2 percent unemployment rate and adding to evidence that Europe's debt crisis was weighing on global growth.

Rosengren told reporters after his speech that it was "appropriate to have more quantitative easing" from the Fed.

His comments were echoed by fellow Fed official, Chicago Fed President Charles Evans, also speaking in Bangkok.

"Additional monetary accommodation is need to more quickly boost output to its full potential level," said Evans, one of the Fed's most dovish voices. "The economic circumstances warrant extremely strong accommodation.

Neither is a voting member of the FOMC this year, but both will be in 2013.

RISKS GROWING IN JAPAN

Some analysts also believe the Bank of Japan might be compelled to expand its own asset purchase program on Thursday at the conclusion of its monthly policy-setting meeting.

"The BOJ looked like it would be on hold this week, but given weak U.S. economic data and monetary easing by central banks in China and Europe, there is now a 50 percent chance that the BOJ could ease this week," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

A surprise interest rate cut from the People's Bank of China last week - the second in a month - on the same day that the European Central Bank also cut rates and the Bank of England expanded its quantitative easing program - has only served to deepen the downside risks being priced into asset markets.

Asian shares and the euro slumped on Monday as sluggish U.S. jobs data and cooling inflation in China deepened worries about slowing global growth.

"What investors are most sensitive to right now is the risk of an economic deceleration around the world," said Tetsuro Ii, president of Commons Asset Management.

A raft of recent profit warnings from Chinese firms covering a swathe of sectors from sportswear to steel production and property development clearly demonstrate the downturn in prospects for the real economy - not just in the aggregate data.

But the signals from the two big Asian economies and the still precarious position of debt-ridden Europe - on which much of the downside risks to global demand and economic growth are focused - do raise the likelihood of policy action, coordinated or not, in major economies across the globe.

Euro zone finance chiefs meet in Brussels later on Monday for talks focused on plans to reinforce the single currency, but they may end up doing little more than highlighting limitations of last month's deal to help indebted states and banks.

CHINA READY TO ACT

There's more chance of action from China, the biggest marginal generator of growth in the global economy, where politics are shifting policy into pro-growth high gear ahead of a once-a-decade handover of power scheduled for the autumn.

The showpiece event means the government is determined to ensure it takes place against a backdrop of social stability and economic prosperity, the delivery of which the Communist Party says justifies its one-party rule.

Premier Wen Jiabao was quoted by the official Xinhua news agency on Sunday as saying more aggressive efforts were needed to support growth in the face of substantial downward pressures.

China has been easing monetary and fiscal policy since the autumn of last year, during which time growth has continued to slow, with data scheduled for release on Friday expected to show that the second quarter of 2012 was the weakest three months of growth since Q1 2009.

The benchmark Reuters poll forecasts China's economic output in the second quarter grew 7.6 percent from the year-ago period. Chinese GDP grew 8.1 percent in the first quarter of this year versus the first quarter of 2011.

China's central bank unexpectedly cut benchmark interest rates last week for the second time in a month in a bid to bolster growth. It has also lowered banks' required reserves ratios (RRR) in three 50 basis point steps since November 2011, freeing an estimated 1.2 trillion yuan ($190 billion) to lend.

Meanwhile the Yiwu "Prosperity Index" - based on data from wholesalers in the eastern city in Zhejiang province that is a bellwether of low-cost exports - has dipped below the level separating expansion from contraction for the first time since its launch in 2006.

Published by China's Commerce Ministry, the index stayed above its current level even when China's exports cratered during the global financial crisis in 2009.

China's June trade data is scheduled for release on Tuesday - the next in a series of major economic indicator releases for the Chinese economy - and is likely to reinforce market expectations for action.

"The looming risk of deflation highlights weak aggregate demand, and not just softening global commodities prices," economists at HSBC said in a client note.

"We see plenty of ammunition left and expect more quantitative easing in the form of additional 200 bp RRR cuts for the rest of this year and further fiscal easing measures. Get ready for the next RRR cut."

(Reporting by Beijing, Tokyo and Bangkok bureaux; Editing by Raju Gopalakrishnan)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (4)
iq160 wrote:
“Additional monetary accommodation is need to more quickly boost output to its full potential level,” said Evans, one of the Fed’s most dovish voices. “The economic circumstances warrant extremely strong accommodation.”

The flaw in this reasoning is of course, the expectation that expensive borrowing is what is holding back investment and that making money cheaper to borrow will solve that problem.

With money at an all time low for borrowing costs, it’s pretty clear that this assumption is flat out wrong, and that can be demonstrated by the failure of the last two attempts (QE1 and QE2) in increasing economic activity. Companies aren’t hiring and expanding because of the great uncertainty in the immediate future, let alone the distant future. With huge cuts looming next year and a continual verbal assault from President Marxist against companies, they’re simply sitting it out until the election to see what happens.

The irony is that these companies have been waiting for several years now, and that has caused the downward spiral in buying that normally leads to new investment. Even though President Marxist and the Demoncrats haven’t yet been able to increase taxes, their intention is well known, so companies and even individuals are cutting back spending to improve their financial position for the unknowns coming their way.

As long as the vast majority of companies are intentionally sitting on the sidelines waiting to see what happens, lowering the interest rates via QE3 won’t do anything.

Jul 09, 2012 5:27am EDT  --  Report as abuse
RoaringFish wrote:
@iq160

For a guy who was boasting in another thread of being a sucessful business man who voluntarily reduced income by 90% (hahahaha! Yeah…) to avoid taxes, you really don’t know much about how money works.

iq160 wrote:
“The flaw in this reasoning is of course, the expectation that expensive borrowing is what is holding back investment and that making money cheaper to borrow will solve that problem.”

Here you are factually wrong. QE is not a way to make borrowing cheaper. It is a way to increase liquidity. I wonder if you can work out why they are choosing this route? I know, but I am sure you don’t.

iq160 wrote:
“Companies aren’t hiring and expanding because of the great uncertainty in the immediate future, let alone the distant future.”

This is another factual error. You really should swith off the Fox News, because they are making you look a fool. Anybody who has genuinely been in business (in contrast to your on-line fantasy…) knows that no business that could expand is going to refuse to do it because the president is a Democrat. That is a ridiculous idea.

One thing, and one thing only, decideds decisions to expand or hire: customer demand. If you don’t have the staff/resources to meet customer demands, you hire and/or expand regardless of who is president. If you don’t, and turn business away instead, you are on the road to failure.

Of course, you have no experience of this.

iq160 wrote:
“Even though President Marxist and the Demoncrats haven’t yet been able to increase taxes, their intention is well known, so companies and even individuals are cutting back spending to improve their financial position for the unknowns coming their way.”

Another factual mistake. Tax on profits is not a business cost, because you have to generate the profit *before* you pay tax on it. This is a fundemental mistake made by many Republicans, who don’t have a clue how business works. Nobody is going to refuse to make a profit because they don’t want to pay tax on it…

Jul 09, 2012 9:58am EDT  --  Report as abuse
jrj906202 wrote:
Great comments by iq160.He seems to understand the problem.As long as Obama is going to demonize success and reward failure we are going to continue our decline.We need higher taxes on the people who keep voting for more wasteful govt spending.The U.S. consumes too much and produces too little.What we need are higher consumption taxes and lower taxes on investment.Here’s one example of a good tax.How about a 1 cent tax on every text message.That would bring in revenue and hopefully encourage people to use their time better and more productively.Cut the long term capital gains tax to zero and encourage Americans to invest in great companies,to secure their future.There is no good future,for the U.S.,in this continued worship and dependence on our wasteful,inefficient,bankrupt govt.

Jul 09, 2012 12:47pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Track China's Leaders