In an unexpected move Friday, China's central bank cut interest rates. The rate cut is intended to jump start slowing growth. China's economic growth fell to a five-year low last quarter. Manufacturing and other key economic indicators have been weak.
The People’s Bank of China said the move did not signal a change in monetary policy, and conditions in the world’s second largest economy are within an "appropriate range."
In Frankfurt, Mario Draghi, president of the European Central Bank, said the ECB will use more aggressive measures like large scale asset purchases – read: quantitative easing - to prevent the euro zone from falling into a new crisis. "We will continue to meet our responsibility,” Draghi said in his speech. “We will do what we must to raise inflation and inflation expectations as fast as possible.”
Global markets rallied on the move, and U.S. stocks opened the trading day up sharply.
The Chinese and European central banks' moves are a sign global economies are in very different places than their U.S. counterpart. “Here we have two other very large central banks joining Japan in being very aggressive in trying to get out of the deflationary trap, trying to make things grow faster while in the U.S. the Federal Reserve is looking for an opportunity to do the opposite,” Yahoo Finance Senior Columnist Michael Santoli says.
Draghi’s speech, which reportedly used the word “inflation” 45 times, stressed the ECB’s concerned over the risk of deflation in Europe. In a deflationary environment, consumers and businesses slow or put off spending or investing in the expectation that prices will fall.
"The U.S. has outperformed so much, but the rest of the world - they have been left behind to some degree. And in theory global investors are going to celebrate this idea until you might see any adverse impacts,” says Santoli.
Stocks in the U.S. are poised for a fifth straight week of gains. But how long can this last? “We’re getting near the point of diminishing returns in terms of exactly how much more upside you can get for U.S. stocks from this kind of activity around the world,” Santoli says. “We’re already at a relatively pricey level.”
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