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Explainer: Rising U.S. inflation and what it means for markets

A man unloads vegetables at Grand Central Market in Los Angeles, California, March 9, 2015. REUTERS/Lucy Nicholson

By Chuck Mikolajczak and Lucia Mutikani

(Reuters) – U.S. financial markets have been roiled recently by something neither the economy nor investors have had to contend with for the better part of a decade: concerns they may soon have to reckon with rising inflation.

The S&P 500.is down more than 7 percent from its lifetime high hit on Jan. 26 through Feb. 13, after falling as much as 10.2 percent, and yields on the benchmark U.S. 10-year note have climbed to a four-year high, largely due to inflation worries.

What exactly is inflation, aside from a rise in prices for goods and services, and why is it having such a strong influence on markets?

Inflation is measured in a number of ways by various government agencies, and as long as the economy continues to expand it will be a consideration for markets.

Investors will get the latest inflation data on Thursday with the monthly Producer Price Index.

WHAT IS INFLATION AND HOW IS IT MEASURED?

While inflation decreases consumer purchasing power, a certain level of inflation is considered a reflection of a strengthening economy and the impact on consumers can be offset by rising wages.

The U.S. government publishes several inflation measures on a monthly and quarterly basis. The main measures are the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) price indexes. The CPI and PCE are constructed differently and perform differently over time.

The monthly CPI, compiled by the Labor Department’s Bureau of Labor Statistics (BLS), measures the change in prices paid by consumers for goods and services. The BLS data is based on spending patterns of consumers and wage earners, although it excludes rural residents and members of the Armed Forces.

CPI measures the prices that consumers pay for frequently purchased items. The components are weighted to reflect their relative importance, with the weightings derived from household surveys. Some of the components of the CPI basket such as food and energy can be volatile. Stripping out food and energy from the CPI gives us the core CPI, seen as a measure of the underlying inflation trend.

The January reading on consumer prices released on Wednesday showed prices rose more than expected, up 0.5 percent versus the 0.3 percent expectation. The core reading rose 0.3 percent against the 0.2 percent forecast. Both numbers increased from the 0.2 percent reading for December.

Another reading is the Producer Price Index (PPI), which measures prices from the seller’s point of view.

The Federal Reserve, whose mandate includes price stability along with maximum employment, prefers the personal consumption expenditures (PCE) price indexes constructed by the Commerce Department’s Bureau of Economic Analysis. PCE is considered to be more comprehensive because it includes some components that are excluded from the CPI. According to the BEA, the PCE reflects the price of expenditures made by and on behalf of households. Weights are derived from business surveys.

Housing has a greater weighting in the CPI than in the PCE index. The weighting for medical care is greater in the PCE price index than in the CPI. As with CPI, food and energy components of the PCE are volatile. Stripping them out yields the core PCE, which measures the underlying inflation trend. The core PCE is the Fed’s preferred measure for its 2 percent inflation target.

WHAT SPARKED THE RECENT INFLATION WORRY?

The government’s monthly employment report for January, released on Feb. 2, showed wages posted their largest annual gain in more than 8-1/2 years, suggesting the economy was moving closer to full employment and inflation was on the horizon.

If the economy continues to gain momentum, inflation is likely to rise further toward the Fed’s 2 percent target.

There is concern, however, that the recent U.S. tax overhaul by the Trump administration, which slashed the corporate income tax rate and cut personal income tax rates, could cause an economy that may be nearing full capacity to overheat and prompt the Fed to become more aggressive than anticipated in its course of interest rate hikes.

Markets are pricing in an 87.5 percent chance of a quarter-point increase at the U.S. central bank’s next policy meeting in March. The Fed has forecast three hikes this year, after raising rates three times in 2017.

Some market participants are unsure about how swiftly the Fed will react to inflation and market turbulence under its new chair, Jerome Powell. The March meeting will be the first since Powell took over from Janet Yellen. Recent comments from some Fed officials suggested the possibility of more hikes should the economy continue to strengthen.

HOW HAS INFLATION AFFECTED MARKETS?

Many analysts believe the stock market was overdue for a pullback because valuations, as measured against corporate earnings, have been rich by historic standards, and that the employment data showed economic fundamentals underpinning stocks are strong. Inflation has yet to rise to concerning levels, and as long as the pace remains modest, stocks have room to climb.

Healthy economic growth, along with U.S. deficit spending and moves by central banks around the world to lift interest rates from ultra-low levels, has driven U.S. bond yields to a four-year high. Rising yields could dent the attractiveness of high dividend-paying stocks to investors and trigger increased borrowing costs for U.S. companies and households, which could crimp economic growth.

The initial reaction to the CPI data on Wednesday was sharp, with S&P 500 e-mini futures <ESc1> falling to a session low of 2,627 while yields on the benchmark U.S. 10-year note <US10YT=RR> rose as high as 2.891 percent. The dollar initially spiked higher against a basket of major currencies <.DXY> before weakening.

However, stocks recovered and turned positive shortly after the opening bell and yields on the 10-year note eased.

A strengthening currency would normally go hand-in-hand with an improving economy, yet the U.S. dollar is near four-year lows even after a recent uptick. Some of the weakness has been attributed to anticipation of scaling back in stimulus measures by central banks other than the Fed.

If the U.S. economy fails to show any meaningful uptick in inflation as currently feared, that could tie the Fed’s hands when it comes to interest rate hikes and drag the dollar lower.

(Reporting by Chuck Mikolajczak; Additional reporting by Richard Leong; Editing by Alden Bentley and Leslie Adler)

Fidelity clients suffer second website glitch in week

News of the Dow Jones Industrial average passing 20,000 and Boeing's stock price play on television at a Fidelity Investments office in Cambridge, Massachusetts, U.S., January 25, 2017. REUTERS/Brian Snyder

BOSTON (Reuters) – For the second time in a week, some clients at Fidelity Investments could not access their online accounts at the powerhouse retail trading brokerage on Monday morning in a glitch described by the company as a technical issue.

The latest problems began early morning, just as investors geared up to make trades in a surging stock market fueled by a tax bill that could slash corporate tax rates to 20 percent from 35 percent.

Fidelity spokesman Mike Aalto said some clients were unable to log in to their accounts during the first hours of trading.

The issue was not resolved until later in the morning, around 11 a.m. EST (1600 GMT), he said.

“We are still looking into what the cause was,” Aalto said.

Boston-based Fidelity, known for its stable of mutual funds, operates a large online brokerage with nearly 25 million customer accounts. Fidelity said Monday’s issue had a sporadic affect on customer accounts.

On Nov. 29, Fidelity clients also experienced problems accessing their accounts because of what the company called an internal technical issue. Fidelity declined to give more details about what caused the issues.

 

(Reporting By Tim McLaughlin and Svea Herbst-Bayliss; Editing by Chizu Nomiyama and Marguerita Choy)

 

Wall Street opens higher, Dow rises to record high

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 20, 2017.

By Sweta Singh and Ankur Banerjee

(Reuters) – U.S. stock indexes opened higher on Monday, with the Dow hitting a record high, as investors remained optimistic on corporate earnings in the second quarter.

Investors have been counting on earnings to support the relatively high valuations for equities, with the S&P 500 trading at about 18 times earnings estimates for the next 12 months, above its long-term average of 15 times.

Of the 289 S&P 500 companies that reported results until Friday, 73 percent of them beat analyst expectations. This is above the 71 percent average over the past four quarters, according to Thomson Reuters.

The S&P 500 slipped on Friday on negative reactions to earnings reports from high-profile names such as Amazon, Exxon and Starbucks and a drop in shares of tobacco companies.

“We had a choppy week last week, we had a very erratic week, so coming off a erratic week, we’re getting some early morning premarket bargain hunting,” said Andre Bakhos, managing director at Janlyn Capital LLC.

“We’re not having anything coming that the markets can sink their teeth into.”

Apple Inc, a part of the Dow, is expected to report quarterly results after market close on Tuesday and its performance may hold the sway over tech stocks this week.

At 9:37 a.m. ET (1337 GMT) the Dow Jones Industrial Average was up 61.07 points, or 0.28 percent, at 21,891.38, the S&P 500 .SPX was up 4.68 points, or 0.19 percent, at 2,476.78 and the Nasdaq Composite was up 18.28 points, or 0.29 percent, at 6,392.96.

Seven of the 11 major S&P sectors were higher, with the financial index’s 0.38 percent rise leading the gainers.

On data front, contracts to buy previously owned homes rebounded in June after three straight monthly declines.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed last month, jumped 1.5 percent to a reading of 110.2.

The Federal Reserve of Dallas will release its monthly manufacturing index for July at around 10:30 a.m. ET.

Oil prices rose on Monday, putting July was on track to become the strongest month for the commodity this year.

Scripps Network was up 1.23 percent at $87.98 premarket after Discovery Communications said it would buy the media company for $14.6 billion.

Charter Communications Inc shares were up 4.3 percent at $386.13 after the U.S. cable operator said on Sunday it was not interested in buying wireless carrier Sprint Corp.

Shares of Snap Inc fell 4.1 percent to $13.10 and hit a record low, as a share lockup ended, allowing for sales by early investors and pushing it further below its March initial public offering price.

Advancing issues outnumbered decliners on the New York Stock Exchange by 1,495 to 1,017. On the Nasdaq, 1,278 issues rose and 971 fell.

 

(Reporting by Ankur Banerjee, Sweta Singh, and Sruthi Shankar in Bengaluru; Editing by Arun Koyyur)

 

World stocks retreat from record highs as valuations give cause for a pause

FILE PHOTO: Visitors looks at an electronic board showing the Japan's Nikkei average at the Tokyo Stock Exchange (TSE) in Tokyo, Japan, February 9, 2016. REUTERS/Issei Kato/Files

By Vikram Subhedar

LONDON (Reuters) – Global stocks paused near record highs as worries over China’s banking system provided an excuse for investors to lock in some profits. The dollar was set for its best week of the year on bets the Federal Reserve will raise U.S. interest rates in June.

A dip on Wall Street overnight on signs of weak consumer spending and waning enthusiasm over the recovery in European corporate earnings has put MSCI’s gauge of world stock markets <.MIWD00000PUS> on track for its first weekly loss in four.

The index trades at now trades at more than 16 times forward earnings, according to Thomson Reuters data, and above its long-term average of 15.6 times.

U.S. stock futures <ESc1> were down another 0.2 percent on Friday.

“We’ve had a nervous twitch about China, over this week,” said Sean Darby, chief global equity strategist at Jefferies. “We’ve had a bit more of a regulatory overhang coming through in the financial system.”

China’s banking regulator this week launched emergency risk assessments of lenders’ new business practices, sources told Reuters, as Beijing extends its crackdown on shadow banking.

With corporate earnings seasons in the U.S. and Europe drawing to a close investors, focus is likely to shift back to central banks, particularly in the United States, where inflation pressures are growing.

U.S. data on Thursday showed producer prices rebounded more than expected last month, leading to the biggest annual gain in five years.

Combined with a tightening labor market, firming inflation backs market expectations that the Federal Reserve will raise interest rates at its meeting next month. The central bank has forecast two more increases this year after raising rates a quarter of a point in March.

The stronger fundamentals in the U.S. helped offset uneasiness over political turmoil after President Donald Trump abruptly fired FBI chief James Comey.

The dollar index, which tracks the currency against a basket of six major rivals, was flat on the day at 99.622 <.DXY>, but was up 1 percent for the week.

Sterling was steady on the day at $1.2886 <GBP=> after dropping to a one-week low on Thursday following the Bank of England’s decision to keep interest rates unchanged. Policymakers indicated that rates were unlikely to rise until late 2019.

EUROPE’S SWEET SPOT

In Europe, stock markets steadied this week. Company profits are expected to grow 20 percent in the first quarter, the best corporate results in a decade, according to Morgan Stanley.

Their outperformance this year against global peers remains intact, with the benchmark’s <.STOXX> 10 percent gains outpacing the 7 percent rise on the S&P 500 <.SPX>.

Greek stocks <.ATG> snapped a their longest winning streak in two decades.

“European stocks are still in the sweet spot of basking in the removal of political risk in Europe for the time being, though it is somewhat ironic that we could see a modest decline on the week as investors take stock,” said Michael Hewson, chief markets analyst at CMC Markets.

European equity funds pulled in a record $6.1 billion in inflows in the week to May 10, according to data from EPFR, with centrist Emmanuel Macron’s win in the French presidential election seen as a trigger.

Concerns over valuations are beginning to emerge. Credit Suisse strategists cut their rating on Spain, the euro zone’s top performing market for the year, to “underperform,” saying the strong earnings and economic momentum was moderating.

At the same time, the collapse in volatility across asset classes to multi-year or record lows, is tempting more investors into making bets that markets will remain calm given the brighter outlook for global growth.

Bank of America Merrill Lynch said its high-net-worth clients cut cash and resumed buying low-volatility exchange-traded funds.

Yields for the euro zone’s weaker borrowers, such as Italy, Portugal and Spain, were all also 1 to 3 basis points lower as investors awaited announcements of the volumes for expected bond sales next week by France and Spain.

Oil prices held recent gains as traders expected OPEC-led production cuts to extend beyond the middle of this year and as U.S. crude inventories fell to their lowest levels since February.

International Brent crude futures <LCOc1> were at $50.78 per barrel. U.S. West Texas Intermediate crude futures <CLc1> were at $47.85 per barrel, both little changed on the day.

(Reporting by Vikram Subhedar, editing by Larry King)

Dollar rises after sliding on Trump remarks on currency, rates

FILE PHOTO: U.S. dollar notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

By Dion Rabouin

NEW YORK (Reuters) – The U.S. dollar rose on Thursday, rebounding after a slide that investors considered overdone following remarks by President Donald Trump that the currency was getting too strong and he would prefer the Federal Reserve to keep interest rates low.

The greenback and U.S. Treasury yields took a heavy hit after Trump’s comments to the Wall Street Journal, in which he said the strength of the dollar would hurt the economy.

But after losing 0.6 percent on Wednesday – its biggest one-day fall in more than three weeks – the dollar recovered on Thursday against a basket of major currencies <=USD> that tracks its value, rising 0.3 percent.

“Clearly, I think it was oversold yesterday,” said Peter Ng, senior currency trader at Silicon Valley Bank in Santa Clara, California. “The market was very sensitive to headlines given how nervous it has become due to geopolitical risk.”

Trading was also thinner than usual because of the impending Good Friday holiday in the U.S. and Europe this week, Ng said.

Having hit a five-month low of 108.73 yen in early Asian trading, the dollar steadied at 109.20 yen. <JPY=>

“Yes, it was negative what (Trump) said…but it’s not a big surprise – it wasn’t a U-turn in his rhetoric on the exchange rate so far,” said Commerzbank currency strategist Thu Lan Nguyen in Frankfurt.

“The question is: is he able to influence monetary policy in order to get a weaker dollar? That is still an open question.”

Trump’s remarks went against a long-standing practice of both U.S. Democratic and Republican administrations of refraining from commenting on policy set by the independent Federal Reserve. It is also unusual for a president to talk about the value of the dollar, a subject usually left to the U.S. Treasury secretary.

The dollar has shed 1.7 percent against the yen so far this week, its fourth week lower against the safe-haven Japanese currency in five, as a rise in tensions in Asia and Europe prompted yen buying.

Investors are concerned about the upcoming French presidential election as well as possible U.S. military action against Syria and North Korea, and an escalation of tensions with Russia.

The euro fell 0.5 percent to $1.0619 <EUR=> after touching a one-week high in overnight trading.

The dollar was little changed against China’s offshore yuan <CNH=D3>, after falling to a six-day low on Wednesday. It had risen to a one-month high at the start of the week.

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Bernadette Baum)

Investors play safe as Syria tensions rise

Traders work on the floor of the New York Stock Exchange (NYSE) in the Manhattan borough of New York, New York, U.S., April 4, 2017. REUTERS/Brendan McDermid

By Marc Jones

LONDON (Reuters) – Nervous investors sought shelter in gold, Treasuries and the yen on Tuesday as growing tensions over Syria put the U.S. administration and Russia on a collision course.

European shares edged higher, reversing early falls, but Wall Street looked set to open lower, according to index futures <ESc1> <1YMc1>, as uncertainty over looming French presidential elections also simmered.

U.S. Secretary of State Rex Tillerson carried a unified message from world powers to Moscow, denouncing Russian support for Syria, after a meeting with foreign ministers of the Group of Seven major advanced economies and Middle East allies.

Western countries blame Syrian President Bashar al-Assad for last week’s deadly gas attack. U.S. President Donald Trump responded by firing cruise missiles at a Syrian air base. Russian President Vladimir Putin has stood by Moscow’s ally Assad, who denies blame.

Gold <XAU=> hit its highest since November, emerging market stocks <.MSCIEF> were on their worst run of the year so far, while the euro <EURJPY=> fell to a four-month low versus a broadly stronger Japanese yen. <JPY=> [FRX/]

“It’s a relatively modest reaction but there is a lot of geopolitical risk in global markets at the moment,” said TD Securities European head of currency strategy Ned Rumpeltin.

“There is Syria, there is more uncertainty about the U.S. economy after relatively weak jobs numbers and we have French elections coming up.”

The latest polls from France are providing another twist in the race for the presidency, with far-left candidate Jean-Luc Melenchon making ground against the rest of the pack before the first round of voting on April 23.

This has raised the possibility that Melenchon could square off against far-right leader Marine Le Pen – both of whom are eurosceptics – in the election’s decisive second round in May.

German Bunds yields dipped below 0.20 percent for the first time in more than five weeks, before edging higher, while French yields <FR10YT=TWEB> hit a one-week high of 0.96 percent leaving the gap between the two – a key gauge of investors’ concerns – at its widest in six weeks. [GVD/EUR]

“After Britain’s Brexit referendum and the U.S. presidential election surprised markets in 2016, could this event do the same?,” Mark Burgess, global head of equities at Columbia Threadneedle in London, wrote in a note.

Then pan-European STOXX 600 share index <.STOXX> eked out gains of 0.1 percent, led higher by miners <.SXPP> as the gold price rose. MSCI’s main index of Asia-Pacific shares, excluding Japan <.MIAPJ0000PUS> fell 0.2 percent. Emerging market shares were on track for their first four-day losing streak of 2017.

Gold <XAU=>, sought at times of global tension as a safe place to store wealth, last traded up 0.3 percent on the day at almost $1,258 an ounce. The precious metal hit a five-month high above $1,270 on Friday after the U.S. missile strike on Thursday.

The dollar fell 0.1 percent against a basket of other major currencies <.DXY>. The greenback weakened 0.4 percent to 110.53 yen <JPY=> and 0.2 percent to $1.0616 per euro <EUR=>. Sterling rose <GBP=D3> 0.2 percent to $1.2441.

Oil retreated from five-week highs hit earlier in the day as concerns about rising U.S. shale production offset a shutdown at Libya’s largest oilfield over the weekend and the U.S. strikes against Syria that had supported prices.

Global benchmark Brent <LCOc1> fell 4 cents to $55.94, breaking a six-session winning streak.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Kit Rees, John Geddie, Ritvik Carvalho and Nigel Stephenson in London Editing by Keith Weir and Pritha Sarkar)

Global stocks outlook dims with risk aversion on the rise again: Reuters poll

New York Stock Exchange

By Ross Finley and Rahul Karunakar

LONDON/BENGALURU (Reuters) – Optimism about stock market performance this year has wilted, with investors fretting about the global economy and unexpected shocks likely to condemn most key indices to a weaker performance than thought just a few months ago.

The latest Reuters poll of over 250 analysts, fund managers and brokers worldwide taken June 27-July 11 also showed an intensifying pull between stretched share prices – with Wall Street at a record high – and bond markets, with most government bond yields at record lows and vast swathes of them negative.

Strategists at Citi have noted that the gap between the global government bond benchmark yield, just 0.5 percent, and the dividend yield on global equities of about 2.7 percent, is the widest in 60 years, and on that basis, stocks look attractive.

Ten of the indexes polled are expected to be lower by the end of the year when just three months ago the consensus view among forecasters was that they would be up, in some cases significantly. [Graphic: http://tmsnrt.rs/29t4c95]

But the poll results do not provide a definitive picture on where forecasters are recommending investors put their money, although hopes remain high once again that next year will be better, particularly for struggling emerging markets.

The Bank of England is set to reverse course in response to Britain’s shock vote on June 23 to leave the European Union, with rate cuts and renewed government bond purchases nearly certain in an attempt to limit the damage. [BOE/INT]

The trouble is, even though the vast majority polled don’t expect any financial crisis from Brexit, that shock has increased risk aversion, as well as the risk a likely British recession may have ripple effects well beyond its borders.

Expectations for an interest rate rise in the United States have also faded despite a surprisingly strong jobs report last week, triggering a rally in stocks and U.S. Treasuries.

So while in past years the prospect of more central bank cash might have lit a fire under the stock market, there is a clear sense now of pessimism in the latest results about the outlook for European shares, as well as Britain’s FTSE 100. [EPOLL/FRDE] [EPOLL/GB]

“The Brexit vote has damaged the outlook for the global economy and EPS (earnings per share). This is clearly unhelpful for global equities. It also drove global bond yields down to unprecedented levels, which has increased the relative income attractions of equities,” wrote Citi strategists in a note.

“These two opposing forces are likely to keep share prices trapped in the current trading range. While Citi strategists collectively forecast a 7 percent rise in global equities by mid-2017, investors could probably generate a better return if they wait for the next dip.”

Even on Wall Street, where stocks had their worst start to the year ever only to rally back to a record high, in large part on optimism about the economy, many are now cautious, especially ahead of a presidential election in November. [EPOLL/US]

“It’s Brexit one day, election issues the next. We’ve been telling clients to sort of buckle up,” said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management.

However, with increasing central bank ownership of a government bond market limited in size by fiscal restraint, stock and bond prices are likely to continue rising, simply because the money that’s been created has to go somewhere.

The European Central Bank also has both feet on the accelerator, having launched its latest aggressive expansion to its stimulus well before the Brexit vote. Now many are speculating it may have to consider doing even more to make sure the euro zone economy doesn’t veer off track as a result.

Perhaps unexpectedly, the most optimistic outlook appears to be for Japan, where stocks have been beaten down by a soaring yen and a moribund economy. [EPOLL/JP]

In addition to a much lengthier and more aggressive central bank stimulus program than in Europe, more fiscal stimulus is in the pipeline there after elections at the weekend where Prime Minister Shinzo Abe was victorious.

Indian shares are also expected to perform well on relative stability compared with other Asian economies, although forecasts are markedly less optimistic for the remainder of the year than those taken three months ago. [EPOLL/IN]

For Asia more widely, as well as Latin America, forecasters were less upbeat, looking past the U.S. presidential election and potential near-term trouble as a result of Brexit to peg 2017 for a rebound. [EPOLL/ASIA] [EPOLL/BR]

“There are likely to be more periodic sell-offs in risky assets in the months ahead, but we do not expect these to prevent EM (emerging market) stocks from performing reasonably well,” wrote David Rees, senior markets economist at Capital Economics.

“If anything, the vote for ‘Brexit’ appears likely to ensure that global monetary conditions remain looser for longer,” he wrote. “This, along with relatively low valuations, will support EM equities in the next 18 months.”

(Poll data: <EQUITYPOLL1>)

(Other stories from the Reuters global stock markets poll:)

(Additional reporting and polling from reporters in Seoul, Shanghai, Sydney, Tokyo, London, Frankfurt, Milan, Moscow, Johannesburg, New York, Brasilia, Sao Paulo, Toronto and Bengaluru; Editing by Adrian Croft)

Nervy global investors revisit 1930s playbook

Unemployed man during the Great Depression

By Mike Dolan

LONDON (Reuters) – Global investors are once again dusting off studies of the 1930s as fears of protectionism, nationalism and a retreat of globalization, sharpened by this week’s Brexit referendum, escalate anew.

With markets on tenterhooks over Thursday’s “too close to call” vote on Britain’s future in the European Union, the damage an exit vote would deal business activity and world commerce is amplified by the precarious state of the global economy and its inability to absorb any left-field political shocks.

As such, the Brexit vote will not be an open-and-shut case regardless of the outcome. Broader worries about global trade, frail growth and dwindling investment returns have festered since the banking shock of 2007/08 and have mounted this year.

Stalling trade growth has already led the world economy to the brink of recession for the second time in a decade, with growth now hovering just above the 2.0-2.5 percent level most economists say is needed to keep per capita world output stable.

Three-month averages for growth of world trade volumes through March this year have turned negative compared with the prior three months, according to the Dutch government statistics body widely cited as the arbiter of global trade data.

And it’s not a seasonal blip. Last year saw the biggest drop in imports and exports since 2009 and their average annual growth of 3 percent over the intervening seven years was itself half that of the 25 years before, according to Swiss asset manager Pictet. 2016 is set to be the fifth sub-par year in row.

A study published by the Centre For Economic Policy Research shows this paltry pace of trade growth is also below the 4.2 percent average for the past 200 years.

Foreign direct investment growth of 2 percent of world output is also at its lowest since the 1990s, while the hangover from the credit crunch has seen annual growth rates in cross-border bank lending grind to a halt from some 10 pct in the decade to 2008.

Parsing the big investment themes of the next five years, Pictet this month highlighted “globalization at a crossroads” – offering both benign and malignant reasoning and implications.

One of these was that trade deceleration was due in part to the inwards reorientation of the world’s two mega economies, the United States and China — the former due to the shale energy boom and the latter’s planned shift to consumption from exports.

Another factor cited was a shift in the world economy towards services and digital activity that is not captured by statistics on merchandise trade.

But Pictet had little doubt about what brewing developments could swamp all that — rising nationalism on the far right and left of the political spectrum in Europe and the United States.

Britain “threatens to drive a fault line” through one of the world’s biggest free trade blocs, it said, and both presumptive candidates for November’s U.S. presidential election have talked of renegotiating the still-unratified Trans Pacific Partnership binding economies making up 40 percent of world trade.

“If the rising tide of nationalism results in greater protectionism, then the decline in international trade the world has experienced so far could well morph into something more pernicious,” the Swiss firm said, adding that multinationals — particularly banks and tech companies — were most vulnerable.

“1937-38 REDUX?”

Against that backdrop, this year’s market wobbles make total sense — especially as near-zero interest rates limit central banks’ ability to insulate against further shocks.

But echoes of the last major hiatus in trade globalization during and between the World Wars has economists looking again to the 1930s for lessons and policy prescriptions.

In a paper entitled “1937-38 redux?”, Morgan Stanley economists detail the mistakes that saw monetary and fiscal policy tightened too quickly once a recovery from the 1929 stock market crash and subsequent Depression started in 1936.

Over-eagerness to reset policy before private sector confidence in future growth and inflation had picked up saw a relapse into recession and deflation by 1938. The devastation of World War Two followed, and with it huge government spending on military capacity, war relief and eventually reconstruction.

Morgan Stanley goes on to draw a parallel with the global response to 2008’s crash and subsequent world recession.

Waves of monetary and fiscal easing by 2009 underpinned economic activity, but government budgets have again tightened quickly and before inflation expectations or private investment spending and capital expenditure have been restored.

The second world recession in a decade is now seen as a threat, but with a heavier starting debt burden, historically low inflation and interest rates, stalled trade and a worsening demographic profile. That could mean another global government spending stimulus is needed to re-energize private firms.

“The effective solution to prevent relapse into recession would be to reactivate policy stimulus,” Morgan Stanley said.

Success in preventing a new recession without the cataclysm of a world war would be a profound lesson learned. Political extremism, isolation and protectionism make the task far harder.

(Editing by Catherine Evans)