Fed has come to the rescue of a global economy slowing to stall speed

 

It has extended a lifeline to a China sinking ever deeper into a debt-deflation trap.

The Fed has relieved pressure on the $13 trillion nexus of dollar-denominated debt traded offshore. 

The Bank for International Settlements says emerging markets have racked up $5.2 trillion of dollar debt – from companies in Brazil, or Kazakhstan or Korea.

This understates the true scale of borrowing embedded in the derivatives market – FX swaps, forwards, etc – which pushes the dollar liabilities of non-US banks to over $35 trillion. This has to be rolled over continuously. “Much of this debt is very short-term,” said the BIS.

 The Hong Kong property market may start to come back from the worst crash since the Asian financial crisis in 1998.

The Fed deliberately rescued China in 2016 because economic “blowback” from its currency crisis was hitting US shores.

But there is a large caveat to this rosy global picture. It all depends on whether the Fed is ahead of the curve and delivers a soft landing; or whether it is behind the curve, has misjudged the delayed effects of past tightening, and has already let recessionary dynamics take hold.

Mr Powell insisted that the economy was “strong overall” but struggled to explain why a jumbo rate cut was nevertheless necessary.

Personally, I intend to enjoy the Fed party, but not stay too long.

Ambrose Evans-Pritchard Telegraph 19 September 2024

https://www.telegraph.co.uk/business/2024/09/19/enjoy-torrid-fed-rally-world-not-out-of-woods-yet/

How slow can you go?

What is the “stall speed” of an economy?

https://englundmacro.blogspot.com/2013/09/how-slow-can-you-go.html

10-year Treasury

https://englundmacro.blogspot.com/2024/08/10-year-treasury-is-lynchpin-of-global.html

 

The use of leverage in the $27 trillion market for U.S. government debt has been of concern since at least last year amid greater scrutiny of the so-called basis trade.

https://englundmacro.blogspot.com/2024/08/fed-minutes-flag-treasury-market.html