Two things have been bothering me about yesterday’s post. The first is that I might be wrong about the authorities not having the will or ability to provide further stimulus. The Washington Post reports today that the Obama administration is considering cuts in payroll tax — perhaps piecemeal stimulus is still on the cards in the US. The second is that I may be wrong in looking for a broad explanation for the movements of risk assets. There has been a risk-on spike today following the release of a better-than-expected (though not actually good) non-farm payrolls number. Markets seem to be so driven by the minutiae of the data flow that I wonder whether the market action since May is merely the sum of a series of short runs, each driven by the newsflow of the moment.
Against this, monetary stimulus definitely has been reduced and the Fed is actually cutting its holdings of assets — see the balance sheet of the Federal Reserve. And there is no doubt that Europe, at least, is actually cutting government expenditure and that unemployment in the US is remaining stubbornly high. This bodes ill for disposable income growth and thus for consumer spending — Andrew Hunt is arguing (in correspondence) that the only route open to the authorities to promote consumer demand is therefore to reduce savings rates, perhaps by trying to inflate asset prices. One can see that the monetary authorities might be reluctant to opt for such a short-term fix, and might feel that the global economy is strong enough to take its medicine for once. So I am still sceptical of the prospects for further effective monetary and fiscal support and therefore bearish on risk assets.