Macroscope | When the Fed is worried about China, it’s no time to get carried away by Sino-US trade talks
- Nicholas Spiro says the bond market, where the smart money is, thinks the newly dovish Fed is too optimistic about US growth. Meanwhile, 2019 is starting to look like 2016, when China’s softening economy caused concern among US policymakers
As recently as late December, Powell was flagging not only two further rate hikes this year but also a gradual reduction in the size of the central bank’s balance sheet. But policymakers started sounding more dovish after Christmas, and stocks jumped in a rally that has been further fuelled by the Fed’s policy reversal last week.
The benchmark S&P 500 stock index declined more than 9 per cent in December, but has since almost erased that loss. Emerging market assets have performed even better. Buoyed by the recent Fed-induced weakness of the US dollar, the leading MSCI index of emerging market shares has risen 10.5 per cent since January 3. In a note published last Wednesday, JPMorgan said: “A decisively dovish Fed has provided a fresh source of impetus for a bounce in [emerging markets].”
On closer inspection, however, the Fed’s U-turn is cause for concern.
