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September 24, 2017

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Asia data show drop in global demand, Fed officials eye QE3

BEIJING/TOKYO--Asia's two biggest exporters showed further signs of slowing in data published on Monday, signaling risks of a fresh slide in global demand, as a top Federal Reserve official said he was downbeat on the prospects of the U.S. economy.

Japan's core machinery orders in May plunged 14.8 percent from April, with the key gauge of capital spending sinking far below analyst expectations of a 3.3-percent decline. That raised the risk that growth momentum in the world's No. 3 economy will stall if firms start to scale back investment.

Meanwhile Chinese consumer inflation eased more than expected in June, with producer prices in outright deflation for a fourth month, signaling that demand for goods from China's vast factory sector — especially from foreign customers — is declining as the global economy weakens.

Both data points underscored a downbeat assessment of growth prospects in the world's biggest economy by Boston Federal Reserve President Eric Rosengren in a speech in the Thai capital Bangkok on Monday.

"My pessimism is rooted in an expectation of weakness in investment, net exports, and government spending," including "concerns about economic and financial conditions in Europe," said Rosengren, who described himself as more pessimistic than policy-setting colleagues on the Federal Open Market Committee.

He's not alone in feeling grim about near-term U.S. economic prospects, with Wall Street economists more convinced than ever that the Fed will embark on a so-called QE3 program — a third round of quantitative easing via large-scale bond purchases.

A Reuters poll on Friday revealed that primary dealers, the large financial institutions that deal directly with the Fed, expect a 70-percent chance of the US$2.3 trillion QE program being expanded.

The poll was conducted after the U.S. Labor Department reported that employers created only 80,000 jobs in June, far fewer than needed to bring down the 8.2 percent unemployment rate and adding to evidence that Europe's debt crisis was weighing on global growth.

Rosengren, who does not have a vote on Fed policy this year but will next year, told reporters after his speech that it was "appropriate to have more quantitative easing" from the Fed.

His comments were echoed by fellow Fed official, Chicago Fed President Charles Evans, also speaking in Bangkok.

"Additional monetary accommodation is need to more quickly boost output to its full potential level," said Evans, one of the Fed's most dovish voices. "The economic circumstances warrant extremely strong accommodation."

Analysts also believe the Bank of Japan (BOJ) might be compelled to expand its own asset purchase program on Thursday at the conclusion of its monthly policy-setting meeting.

"The BOJ looked like it would be on hold this week, but given weak U.S. economic data and monetary easing by central banks in China and Europe, there is now a 50 percent chance that the BOJ could ease this week," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

A surprise interest rate cut from the People's Bank of China last week — the second in a month — on the same day that the European Central Bank also cut rates and the Bank of England expanded its quantitative easing program — has only served to deepen the downside risks being priced into asset markets.

Asian shares and the euro slumped on Monday as sluggish U.S. jobs data and cooling inflation in China deepened worries about slowing global growth.

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