Last week the Federal Reserve was roundly criticised for not raising interest rates from their emergency settings of 0-0.25% in the Fed Funds rate. Its reasoning, not unreasonably was that inflation was lower than they felt comfortable with, but also that financial and international developments were a cause for concern, which markets took to mean that the Fed was worried about the recent slowdown in the Chinese economy and Chinese policymakers attempts to deal with that, as well as the stock market turmoil.
Since mid-August the economic outlook for the global economy has deteriorated somewhat and Chinese policymakers attempts to deal with their own problems have caused ripple out effects. This slowdown in Chinese economic growth was reinforced further earlier this week with another slide in the latest Caixin Chinese manufacturing data for September, which came in at a new 78 month low.
It has also caused problems for the Australian economy which is highly geared to events in China, and prompted a number of policy easing measures by the Reserve Bank of Australia (RBA)in the last few months.
Given that Chinese authorities have also eased monetary policy four times since last November, China watchers are now asking when all these measures are likely to start trickling down into the manufacturing base and in the process stimulate a recovery.
In this context this weak reading goes someway to justifying the Federal Reserve’s caution in setting off a chain reaction in emerging markets which have become increasingly vulnerable to capital outflows and a weaker economy
On the other side of the coin events in China could also prompt further policy measures from the RBA to cushion the effects of further economic weakness rippling out from the world’s second largest economy.
The knock-on effect on the Australian dollar will be one to watch in the coming weeks.
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