The U.S. Federal Reserve's long-awaited rise in rates from zero
showed confidence in the world's largest economy, but rival China is
still struggling for a foothold with rate cuts.
Although some countries, such as Brazil, have mainly home-grown
inflation troubles, the Fed's first post-crisis rate hike is an
unlikely cure for what ails the rest of the world.
With exchange rates dominating the policy debate in many countries,
what happens to the dollar will matter a lot.
"The key question is whether the U.S. economy is finally robust
enough not only to sustain its own recovery but also to lift world
trade and global growth enough to allow the external deflationary
pressures weighing on U.S. inflation to wane," outlined HSBC
economists Janet Henry and James Pomeroy.
Along with an abrupt downturn in the volume of global trade and a
continuing fall in commodity prices, the dollar's rise this year has
brought U.S. industrial growth to a near-standstill, keeping a lid
on inflation pressures from abroad.
The other extreme, according to HSBC, is that the United States,
"via a strong U.S. dollar, will simply become the latest victim of
the deflationary pass-the-parcel which has plagued the global
economy for a decade, and find itself following all of the other
developed market central banks which raised rates but soon found
they had to reverse course."
"The outcome, we believe, is likely to be somewhere in between."
A Reuters poll of 120 economists on Friday forecast the Fed would
hike rates again in March, but probably won't move as quickly next
year as policymakers have suggested.
Other recent Reuters surveys of hundreds of analysts worldwide do
not offer hope for a pickup in inflation, even in the United States
where the central bank says it is reasonably confident this will
happen. Even the most optimistic core inflation forecasts are not
far above 2 percent.
The polls point to global growth averaging only 3.4 percent next
year with scant prospect of touching 4 percent given the slowdown in
China and the gloom surrounding emerging markets.
Nor is it easy to find analysts expecting broad weakness in the
dollar, with the most aggressive views suggesting the euro could
even fall below parity.
China's renminbi, now a reserve currency, has fallen each day for
most of the past two weeks, with many bracing for further
devaluation by Chinese authorities still looking for ways to
stimulate the debt-laden economy.
SOME HOPE EMERGING
The U.S. growth and inflation outlook is bleaker than forecast this
time last year, even after a sharp fall in unemployment. Wage
inflation has picked up, but by less than many had thought it would.
Wall Street stock indexes are trading near their levels of a year
ago, confounding predictions of a solid rise in 2015, with
strategists still expecting them to climb despite downward pressure
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Over the past year, global fund managers have cut their
recommendations for equity holdings to near their lowest since the
financial crisis, even as they ramped up bond holdings.
U.S. Treasury yields are not far from where they were this time last
year either, but they too are expected to climb, as has been the
forecast for many years now, although by less this year than one
Since crude oil prices began falling sharply 18 months ago from
above $100 a barrel to below $40 now, the number of analysts
predicting a rebound has dwindled. Some are now saying $20 is more
likely than a sizeable move higher. http://link.reuters.com/ses88s
But there are some bright spots.
Underpinned by the European Central Bank's 60 billion euros a month
of bond purchases, the euro zone is finally generating modest growth
and unemployment has begun to fall.
Inflation remains well below target, however, and so ECB stimulus,
including the negative deposit rate, will remain in place for all of
next year. That puts the world's largest trading bloc -- and most
other central banks -- on an opposite policy path to the Fed.
Some emerging market economies are performing better, too.
India is forecast to grow at a decent clip, underpinned by rate cuts
earlier this year during a window of low inflation. And optimism
about Mexico has grown as it slowly starts to take advantage of a
recent historic reform in the energy sector.
But much can still go wrong. Food prices have already pushed
Brazil's inflation above 10 percent during a deep recession and
could rise further.
"As if predicting exchange rates and interest rates wasn't hard
enough, a strong El Niño may be arriving," warned BofA-ML head of
global emerging markets fixed income strategy, Alberto Ades. "So
economists and investors will need to keep an eye on the weather,
(Writing by Ross Finley in LONDON; Reporting by Silvio Cascione in
BRASILIA; Rahul Karunakar, Deepti Govind, Hari Kishan in BENGALURU;
Editing by Catherine Evans)
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