Economic news in the month was set by policymakers. Late in the month international policymakers met at a G20 conference in Korea while US Federal Reserve Governors continued to discuss the merits of a further round of quantitative easing – the purchase of treasury securities.
At the core of G20 discussions was currency valuation. The relative value of currencies has been a bone of contention for policymakers since the global recovery began in 2009. In September, the Bank of Japan intervened in the dollar/yen market to halt a strong appreciation, while the US has been strident in its view that the Chinese yuan is under-valued. The gathering, however, failed to produce an agreement or joint course of action, other than to allow the market to determine prices. A US plan to cap the surpluses of saving economies at 4% of GDP gained little support. Developed world economies continued to encourage Asian currency appreciation in the belief that this would spur further Chinese appreciation, though again no agreement was reached. It seems as though the spirit of co-operation that characterised the post crisis G20 is falling away as individual economies look to accelerate their own economy’s recovery.
In the wake of the G20, the policy discussion for global markets turned again to quantitative easing in the US (or QE2). In September and early October, markets assigned probabilities to QE2 based on economic news. As the next Federal Reserve meeting drew closer, however, the market became focused not on ‘if’, but ‘how much’. There is clearly some disagreement within the Federal Reserve on the appropriate size of the policy response. So-called policy doves, such as William Dudley, have advocated as much as $500 billion in market purchases, while others have put the figure at closer to $100 billion on an as needed basis. It seems likely, with policy makers signalling an easing, that QE2 must be above market expectations so as to justify action. With the market focused on policy, economic data became of secondary importance. Early in the month, the continued anaemic pace of growth in the labour market seemed to provide further support for more policy action.
Indeed, on a net basis jobs were lost in the US in September as the public sector cut employment, particularly in teaching. Employment fell by 95,000, though private sector employment rose by 64,000 jobs while the unemployment rate held steady at 9.6%. Elsewhere, the economic data generally remained positive and certainly not indicative of a double dip recession. In some areas, such as industrial production and durable goods orders, growth was negative in the quarter. Elsewhere economic data was in line or surprised to the upside relative to analyst forecasts.