Mark Milner
It has taken the markets a while to get the message. Latterly, however, the penny appears to have dropped with a vengeance. The days of post-97 meltdown policies in Europe and the United States are drawing to a close.
US Federal Reserve chair Alan Greenspan’s Humphrey Hawkins testimony and the latest auguries from Wim Duisenberg at the European Central Bank carry a clear signal. The next move in interest rates on both sides of the Atlantic will be up. The real question now is about timing.
Given the previous party mood in equity markets especially it is small wonder that stock indices have been looking slightly sick – not least in Europe recently – or that treasury yields have spiked, and the yen and the euro (yes, the euro) are recovering sharply against an overbought dollar. So, are Central Bank policymakers back to tweaking interest rates in response to the slow rhythm of economic cycles rather than mitigating the disruption of seismic shocks?
Up to a point.The Japanese economy is dragging itself out of the doldrums. Confidence is returning to other parts of Asia. Yet there are few signs of the structural reforms Western economic gurus had deemed essential. The region will remain vulnerable, too, to market mood swings between fear and greed; undampened in the case of many foreign investors by any detailed knowledge or deep commitment. The capacity for the nasty surprise remains. So does Russia.
Euroland will not be any too thrilled by the rebound in the single currency, either. Growth is on the uptick but cosy calculations may need to be reviewed if a rapidly appreciating euro starts to check exports and boost imports. Markets then might suddenly notice the odd euroclub member – OK, Italy – will then have real problems sticking to the strict letter of the stability pact.
Nor is it plain sailing in the US. Information technology has delivered a once-in-a-lifetime sea change to productivity but, as Greenspan has observed, it has not rewritten the law of supply and demand. Capacity may become constrained yet demand remains robust.
Unless Greenspan can do something about the latter, by talking down the Wall Street wealth effect for a start, trouble looms. Protectionism may suddenly gain a wider audience than the steel industry – particularly if the Gore presidential bandwagon needs a jumpstart. The markets still have much to be nervous about, not least their own past exuberance.