Salient to Investors:
Ellen Zentner at Morgan Stanley said:
- The Fed’s near-zero interest rate and QE is holding down US bond rates, meaning the US Treasury yield curve would struggle to invert, crimping its effectiveness as an indicator of business cycles.
- Yield curve inversion signals investors are betting on weaker economic growth – recessions have followed 6 of the 8 times that has happened since 1960, and no US recession in the period was not preceded by an inverted curve.
- The upturn in the Duncan Leading Indicator since Q2, 2009 confirmed the end of the last recession and its subsequent gain over the past 17 quarters indicates the risk of an economic slump in 2014 remains low. The DLI looks at components that react to cyclical demand, such as household spending, and compares them with economic growth. Since 1970, the DLI has indicated imminent downturns by an average of four quarters. A 1985 FRB of San Francisco study found it a more reliable indicator of business cycle peaks than other tools.
Paul Mortimer-Lee at BNP Paribas said:
- Arguments that QE can choke consumption could apply to any easing of monetary policy and the Fed’s 3 rounds of asset buying have added 1.5 percent to US consumption.
- QE cannot both stimulate and deters excess investment
- Market distortions are often needed to help the economy
- QE may have had a limited effect on activity, but it has helped to fend off deflation.
Ralph Solveen and Bernd Weidensteiner at Commerzbank said Japan’s stagnation does not provide a template for the euro area because prices fell in Japan not because of a weak economy but because their level stayed elevated during the preceding boom and needed to be corrected, whereas there was no such jump in prices in the euro area, where inflation is likely to grow at an annual rate of 1 percent, excepting peripheral economies like Greece and Spain, where a price correction is now under way.
Bank of America said Ukraine, Turkey and South Africa are the emerging markets most vulnerable to Fed tapering, while China and South Korea should be the most resilient. Ukraine and Turkey suffer from high external debt and a lack of reserves, while South Africa is weakened by its current account deficit. South Korea benefits from low inflation volatility and a strong fiscal position, and China has a current account surplus and large currency reserves.
Bank of America said a 1% shock to US growth would have the most durable impact on Mexico but provide a pickup for South Korea, add 0.2 percent to expansion in Turkey and India, and a modest and short-term effect on China.
Anja K. Leist at the University of Luxembourg, Philipp Hessel at the London School of Economics and Mauricio Avendano at Harvard School of Public Health found that men aged 45 to 49 and women aged 25 to 44 in 11 European countries who suffered through an economic slump showed worse cognitive functions 25 years later.
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