Central bank competence: are they prepared for more economic shocks?
Emerging Markets are caught in the middle of an economic storm. Their cash flows are derived from trade with China, which is now acting to cut its leveraging, resulting in the slowing of its economy, while debt is denominated in US Dollars and the Federal Reserve is raising rates. On top of this, since July 2017, oil prices have been rising, and therefore what markets perceive to be individual pockets of risk are developing into new structural changes. Potentially, central banks are being far too complacent, underestimating how current tremors can quickly develop into greater shocks.
Macro Thoughts, April 24, 2018: ‘China has now been forced to cut rates, andheavily indebted nations who have spent the past decade borrowing in cheap Dollars may be hit by their own local currency weakness, forcing their own interest rates higher, while economies slow’.
Chinese 10 year yields have started to correct higher (since the beginning of July, coinciding with the appreciating Dollar’s stabilisation), and since the end of August, US 10 year yields have started to follow, despite weaker Retail Sales and inflation data.
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