The business cycle is alive and well
The Federal Reserve did what they probably didn't want to do. They stirred up a hornet's nest in the markets by shifting to a bias for a probable interest rate cut from a bias of a probable increase. Analysts who went home last weekend looking for a simple change in bias, were by Monday suddenly looking for an interest rate cut. When they got the change in bias, they didn't want to hear it. Nevertheless, the Fed confirmed that they too think growth is slowing rapidly - but not enough to cut interest rates. Equities, which had been trading in positive territory, reversed course abruptly and sank worldwide.

Already anxious from the river of earnings disappointments, analyst downgrades, slowing economic indicators and weak holiday retail sales, U.S. investors needed very little to push them over the brink. They sold, and then sold some more. They took equities in Asia and Europe down on Wednesday (Asian and European markets were closed when the Fed made their announcement). The only index tracked here that is still on the plus side for the year is the Toronto Stock Exchange composite 300.

There was little reaction in the currency markets at first. Then the euro rose as European investors decided the grass was greener on their side of the Atlantic. However, the yen continued to slide. Things are still worse on the other side of the Pacific.

Both the Bank of Japan and the Bank of England released minutes of recent monetary policy meetings. Both focused on the sharper than expected slide in world economies. The British economy appears to be holding up better than almost any other and has an even lower unemployment rate than the United States by some measures. Conversely, Japan is perhaps the most vulnerable to a hard landing in the U.S. The risk is that slowing growth overseas may hit growth generating exports and be a devastating blow to the already faltering economy.

The European Central Bank (ECB) released its first economic forecast - under heavy fire for doing so - in another attempt at transparency. In order to avoid the ridicule that pinpoint forecasts usually generate, all forecasts were given in such wide ranges that their usefulness could be questioned. The ECB staff estimates that economic growth will slow slightly in the next two years as will harmonized consumer inflation. GDP growth will range between 2.6 to 3.6 percent in 2001 and harmonized consumer price increases between 1.8 to 2.8 percent. The ECB has been at pains to emphasize that these staff projections do not reflect the views of its policy making Governing Council and that they are based on the assumption that short term interest rates and euro exchange rates will remain unchanged over the projection horizon.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead