The global economy is cooling.

Photographer: Udit Kulshrestha/Bloomberg

Steel Production Falls, Stock Markets Follow

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Picture the world as one single enormous factory. Now imagine that factory is running at less than three-quarters of its full capacity, and ask yourself whether that suggests an economic backdrop in need of higher interest rates -- and whether you'd want to be buying or selling equities.

The Fed's Countdown

Global financial markets are in meltdown. The world's stock markets have lost more than 13 percent of their value since the start of June, wiping almost $10 trillion off the market capitalization of companies around the globe. It's the deterioration in the real economy, though, that should be restraining the Federal Reserve from following through on its threat to push up borrowing costs next month.

One of the most basic measures of the global economy is how much steel the world is (or isn't) producing. On that basis, we're heading for trouble.  Production slumped by 3.8 percent last month compared with a year earlier, extending June's 2.4 percent drop and a 2.1 percent decline in May:

Even more worrying is what the World Steel Association calculates as the capacity utilization ratio. That indicator suggests steel producers are running at just a tad more than 68 percent of full power:

Source: World Steel Association

For those wondering what happens next in the equity markets, those steel production numbers are truly scary. In the five years from May 2009 until May 2014, the correlation between global stock market values and the World Steel Association's index was 0.7 (where a value of 1 means two numbers are moving in lockstep and a value of zero means they have no relationship to one another). When steel production began to falter after hitting its peak in 2014, stocks bounded on -- until they didn't:

Source: Bloomberg

At the start of this month, traders and investors reckoned the chances of a Fed rate hike were better than 50 percent, based on where they were pricing derivatives in the futures market. Today, that's down to 28 percent:

Source: Bloomberg

I've written before that there's a danger of policy makers wanting to raise interest rates no matter what the inflation outlook is, because being so close to zero for so long makes them uncomfortable. Let's hope that the current market rout, as well as the faltering economic background, is enough to keep the Fed on hold for a while longer. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Mark Gilbert at

To contact the editor on this story:
Cameron Abadi at