It’s summertime and the living is easy
What is not to like?
The snow and cold are gone, the contraction of gross domestic product during the first quarter and both are just a remote memory. The U.S. stock markets continue to set new all-time highs, the volatility index (fear index) has been well below average, bond yields have trended lower since the first of the year and the tapering of the Fed’s bond purchases have not disrupted markets. Unemployment is moving lower, jobless claims are bouncing at 7 year lows, inflation appears to be contained and projections of domestic economic growth for the second half are well ahead of the dismal first quarter.
Life is good, what could go wrong?
Maybe we can start with the low-hanging fruit of matters of concern, mainly geo-political risks. The prime candidates are Ukraine and Syria, not that either are economically significant on their own, but for their broader risks to regional order and implications. There also is Iraq and its impact on global oil prices. Oil has climbed higher on world markets over the past several weeks as Iraq has very large proven reserves and if its production should be shut down, it would greatly reduce the slack in excess oil production capacity. The tension in the South China Sea between China and its neighbors over potential energy fields could reverberate in international trade.
Of more direct economic impact are efforts by China to rein in its “shadow banking” system of private lending and its overheated real-estate market. It is also attempting to pivot its focus from export-driven development to that for domestic consumption. This has been referred to as engineering a soft landing to cool off its economy and to date this appears to be the case. Europe is working in somewhat the opposite direction, adding stimulus to the euro region to avoid deflation and spur economic expansion. Euro area bond markets have calmed down from events of the past several years and inflationary pressures in core euro markets are very weak.