MAGGIE PAGANO: The economy is at a crossroads
Translating the smoke signals floating over Jackson Hole when central bankers gather for their annual party this week is going to be more baffling than ever.
At this time last year they were debating how much interest rates should rise to curb rampant inflation, marking the pace of a year in which the West raised the cost of borrowing to the highest levels since the Great Financial Crash of 2008.
A year is a long time. The mood has changed drastically. This year, bankers are more concerned about how conflicting crosswinds from around the world, fueled by fears of a slowdown and a housing collapse in China, are affecting growth. Just yesterday, the Chinese authorities cut rates again in an attempt to restore activity.
Market traders will take the lead from Jay Powell, head of the Federal Reserve, who has been the most aggressive in pushing rates higher.
You have to be careful about the signals you send for fear of mixed messages. It’s often what it doesn’t say that gives the best clue as to where rates are headed.
Market traders will take the lead from Jay Powell, head of the Federal Reserve, who has been the most aggressive in pushing rates.
Opinion is divided on whether central bankers have gone far enough to rein in core inflation. Interest rate tight-fisters like myself argue that hikes have yet to fully work their way through the weeds of the economy and that hikes should be halted until their full impact is assessed.
Inflation is falling rapidly. Energy and commodity prices continue to decline. The danger is that more increases will cause more damage, driving an already fragile world into recession.
Growth falters everywhere. The world’s largest exporters of manufactured goods, China and Germany, have reported dramatic drops in exports, suggesting a severe decline in manufacturing.
Analysis by economic consultancy Cebr shows the ratio of US inventories to sales is now 1.4, its highest level since the lockdown, as the cost of holding inventory has risen with rates. of interest. Not only China and Germany are the fools. The US manufacturing purchasing managers index is down to 46.4 while the EU index is at 42.3, both well below the 50 benchmark.
Doug McWilliams of Cebr points out that modern stock control measures should mean that the ratio of inventories to sales should fall. However, globalization, which has made supply chains longer and more complex, has done the opposite, causing their increase. That is why so much inventory that is loaded in China and shipped to the West is hidden from public view, as it does not appear in any of the country’s figures.
That’s why the compound global shipping rate has collapsed from $10,377 per container two years ago to $1,791 last week due to falling demand. We can only hope that central bankers planning their next moves in Wyoming will have these shipping numbers in front of them when deciding on the color of the smoke.
They tell a grim story and show why rates need to stay where they are.
on the crest
If shipping rates are any clue to what’s happening in the global economy, home sales are the best indicator in Britain. And it doesn’t look good. On the heels of the dismal results from homebuilders Bellway and Persimmon came the bleakest of Crest Nicholson’s profit warnings.
Home sales have plummeted. Full-year earnings are forecast to be £50m instead of £74m and job cuts are expected.
The home builder sold half of what he expected to sell. That’s a big drop, reflecting how nervous potential buyers are about taking out mortgages when they don’t know which way rates will go next.
While some fixed offers have been falling in recent weeks, future interest rates are still pointing up.
Buyers are sensibly waiting to see what the Bank of England decides next month before taking out a mortgage. They will also expect house prices to fall, which they almost certainly will. However, Crest’s stock could be a buy after nearly halving in the past five years. Despite the gloom, Crest’s Peter Truscott sounded confident.
I smell half empty
The Huel protein shake maker is doing surprisingly well. Backed by celebrities like Idris Elba, Huel is opening a factory in Milton Keynes to meet growing demand.
If my experience of the half-empty tubs left around the house by younger family members with the keep-fit fad is anything to go by, there’s more waste than weight coming off the waistline, because it tastes so awful.