Comment: Global Stocks At Highest Levels Since 2007 As US Economy Warms Up; Pressure On ECB To Act
April 2, 2014 8:26 am
Tuesday’s ISM manufacturing report out of the US lifted hopes about the health of the world’s largest economy which froze during the winter period on the back of severe weather conditions – that led to a deterioration in macro indicators from all facets of the US economy. Yesterday’s ISM release however, indicated the US economy is warming up. Further, the Fed’s Yellen played dove Monday evening by saying she thinks the labour market remains fragile which warrants the need for an accommodative monetary policy until data suggests otherwise, instilling the market with confidence that stimulus measures are not going to come to a sudden end. Yellen sensibly, believes that monetary policy must tighten 6 months or so after the end of QE but at the same time, remains cautious on the overall health of the US economy.
Her comments about raising rates were more of a warning shot or a reminder to the market that rates at some point have to be hiked but she’s maintaining an overall cautious approach to monetary policies. It’s very similar to how Ben Bernanke announced his intentions to taper the bond-buying programme; we knew QE couldn’t last forever and we also know low-interest rates can’t either. Like Bernanke, Yellen is managing our expectations, letting us know well in advance that rates will have to be raised but it’s well flagged and enough time is being given to market participants to feel comfortable about the start of rate hikes. That puts the market in a bit of a sweet spot; forward guidance means we have around about a year to prepare for tighter monetary policies and the Fed is not going to pull out sudden action on us so monetary policy until then will remain accommodative.
As such global stock indices are at post crisis-highs – trading at their best readings since December 2007. On Wall Street Tuesday, the S&P500 closed up 0.7% at an all-time high of 1885.47 while the DJIA traded close to its record high, up 0.46% to 16532.80. Asian markets advanced in response, meanwhile in Europe, the FTSE100 is up around 20 points, the DAX up 45 points – gold is currently up around 4 bucks and in a sign of risk-on mood in markets, traditional safe havens such as core government bonds are falling out of favour as market participants snap up riskier assets on the improving sentiment across global markets.
In Japan, the BOJ’s quarterly Tankan survey suggested conditions in the first quarter were solid but Japanese companies are still worried about the rise in the consumption tax, which took effect yesterday. Furthermore, the BOJ indicated that Japanese companies do not see the central bank hitting its 2% inflation target next year or in the coming years [not even 5 years], undermining the policies of PM Shinzo Abe who believes that level must be hit for the Japanese economy move past years of deflationary mode. That in turn puts more pressure on the BOJ to act, particularly in the face of the softening yen currency.
Turning to today’s data – UK house prices remain robust according to Nationwide – house prices continued to rise in March though at a slightly slower pace but London’s annual growth reached an 11-year high in the Q1 of this year. There’s no surprise then that the surging house prices are helping fuel advances in the UK construction sector with PMIs out today painting a rosy outlook for activity in the sector. UK construction PMIs came in at 62.5 for March, down marginally from February’s 62.6, but still representing strength. Elsewhere, euro zone PPI data showed a fall in prices which was more than expected in February, down 0.2% month-on-month compared to the 0.1% expected by consensus. The data shows that underlying deflationary pressures have accelerated in Q1 this year, driving the fall in PPI for two straight months; within the figures, lower energy and goods prices fell the most while capital goods were flat as well as non-durable goods while durable goods ticked up a touch.
These deflationary threats to the euro zone certainly add more pressure on the ECB to act tomorrow to stimulate the euro zone economy and tackle the issue of deflation head on – earlier this week, harmonized inflation for the euro zone fell to 0.5%, with data last week showing German and Spanish inflation falling. The ECB could cut the refi-rate; it certainly has the ability to act with measures if needed but it’s facing a dilemma here; by cutting rates or getting into negative deposit zone, the ECB is acknowledging deflation which is psychology more damaging to markets because the ECB would be seen as fuelling deflation concerns and worse still, the market will believe that rate cuts or negative deposit rates are not the way to combat deflation.
This will leave the ECB exposed and the market begging for a big bazooka measure rather than just rate cuts and negative deposit rates – big Bazooka is certainly not in the ECB’s interest at this juncture because conditions are not as drastic to warrant that. Indeed, euro zone PMI manufacturing data released Tuesday shows a recovery peripheral euro zone and better conditions in France. So for the ECB, it’s going to have to rely heavily on dovish communication to quell the market, standing pat on policies or risk exposing itself. Staying on the euro zone, data from the Spanish labour market showed continued to stabilisation in March – the unemployment level fell by 16.62k people in March, which is the sharpest decline since 2006 – although Spanish unemployment remains stubbornly elevated, particularly youth unemployment, conditions are likely to improve in the coming months as the economy there gets onto the path of recovery.
Greece is back in the spotlight but this time for all the right reasons because it’s behaved itself which meant euro zone finance ministers on Tuesday finally signed off on a delayed €8.3bn bailout aid tranche for Greece, ending a standoff between the country and its international creditors [the Troika] who insisted that Greece implement more tougher economic reforms. The approval of bailout funds kicked-up the Athens Stock Exchange to around a 3-year high and triggered a fall in the 10-year bond yield by 15 basis points to 6.19%, a level not seen since April 2010 – the lower yields drop, the greater Greece has a chance to return to bond markets as early as this year.
So when assessing market sentiment at the moment, financial investors appear to be sanguine about the global economy as we start the Q2 of this year; US economy unfreezing and we’ve now got a year to prepare for monetary policy tightening; deflation in the euro zone is a big concern but even bigger of the ECB acknowledges it so for now, expect forward guidance to be the ECB’s main tool to communicate to us and at the same time, data out of the region sparks optimism over the region’s prospects this year. Finally, the tensions in Ukraine which have caused a standoff between the West and Russia certainly remain a downside risk but since the peak of that crisis, tensions are easing and there is no likely threat of military action rather just a war of words. This Friday will be the first big macro release in the Q2 with US nonfarm payrolls scheduled for release – before that, we have the ADP jobs report out shortly – an indicator which is seen as a precursor to the payrolls report. Also Wednesday, we have US industrial new orders which will gain some attention following Tuesday’s solid ISM release.
Tuesday’s ISM manufacturing report out of the US lifted hopes about the health of the world’s largest economy which froze during the winter period on the back of severe weather conditions – that led to a deterioration in macro indicators from all facets of the US economy. Yesterday’s ISM release however, indicated the US economy is warming up. Further, the Fed’s Yellen played dove Monday evening by saying she thinks the labour market remains fragile which warrants the need for an accommodative monetary policy until data suggests otherwise, instilling the market with confidence that stimulus measures are not going to come to a sudden end. Yellen sensibly, believes that monetary policy must tighten 6 months or so after the end of QE but at the same time, remains cautious on the overall health of the US economy.
Her comments about raising rates were more of a warning shot or a reminder to the market that rates at some point have to be hiked but she’s maintaining an overall cautious approach to monetary policies. It’s very similar to how Ben Bernanke announced his intentions to taper the bond-buying programme; we knew QE couldn’t last forever and we also know low-interest rates can’t either. Like Bernanke, Yellen is managing our expectations, letting us know well in advance that rates will have to be raised but it’s well flagged and enough time is being given to market participants to feel comfortable about the start of rate hikes. That puts the market in a bit of a sweet spot; forward guidance means we have around about a year to prepare for tighter monetary policies and the Fed is not going to pull out sudden action on us so monetary policy until then will remain accommodative.
As such global stock indices are at post crisis-highs – trading at their best readings since December 2007. On Wall Street Tuesday, the S&P500 closed up 0.7% at an all-time high of 1885.47 while the DJIA traded close to its record high, up 0.46% to 16532.80. Asian markets advanced in response, meanwhile in Europe, the FTSE100 is up around 20 points, the DAX up 45 points – gold is currently up around 4 bucks and in a sign of risk-on mood in markets, traditional safe havens such as core government bonds are falling out of favour as market participants snap up riskier assets on the improving sentiment across global markets.
In Japan, the BOJ’s quarterly Tankan survey suggested conditions in the first quarter were solid but Japanese companies are still worried about the rise in the consumption tax, which took effect yesterday. Furthermore, the BOJ indicated that Japanese companies do not see the central bank hitting its 2% inflation target next year or in the coming years [not even 5 years], undermining the policies of PM Shinzo Abe who believes that level must be hit for the Japanese economy move past years of deflationary mode. That in turn puts more pressure on the BOJ to act, particularly in the face of the softening yen currency.
Turning to today’s data – UK house prices remain robust according to Nationwide – house prices continued to rise in March though at a slightly slower pace but London’s annual growth reached an 11-year high in the Q1 of this year. There’s no surprise then that the surging house prices are helping fuel advances in the UK construction sector with PMIs out today painting a rosy outlook for activity in the sector. UK construction PMIs came in at 62.5 for March, down marginally from February’s 62.6, but still representing strength. Elsewhere, euro zone PPI data showed a fall in prices which was more than expected in February, down 0.2% month-on-month compared to the 0.1% expected by consensus. The data shows that underlying deflationary pressures have accelerated in Q1 this year, driving the fall in PPI for two straight months; within the figures, lower energy and goods prices fell the most while capital goods were flat as well as non-durable goods while durable goods ticked up a touch.
These deflationary threats to the euro zone certainly add more pressure on the ECB to act tomorrow to stimulate the euro zone economy and tackle the issue of deflation head on – earlier this week, harmonized inflation for the euro zone fell to 0.5%, with data last week showing German and Spanish inflation falling. The ECB could cut the refi-rate; it certainly has the ability to act with measures if needed but it’s facing a dilemma here; by cutting rates or getting into negative deposit zone, the ECB is acknowledging deflation which is psychology more damaging to markets because the ECB would be seen as fuelling deflation concerns and worse still, the market will believe that rate cuts or negative deposit rates are not the way to combat deflation.
This will leave the ECB exposed and the market begging for a big bazooka measure rather than just rate cuts and negative deposit rates – big Bazooka is certainly not in the ECB’s interest at this juncture because conditions are not as drastic to warrant that. Indeed, euro zone PMI manufacturing data released Tuesday shows a recovery peripheral euro zone and better conditions in France. So for the ECB, it’s going to have to rely heavily on dovish communication to quell the market, standing pat on policies or risk exposing itself. Staying on the euro zone, data from the Spanish labour market showed continued to stabilisation in March – the unemployment level fell by 16.62k people in March, which is the sharpest decline since 2006 – although Spanish unemployment remains stubbornly elevated, particularly youth unemployment, conditions are likely to improve in the coming months as the economy there gets onto the path of recovery.
Greece is back in the spotlight but this time for all the right reasons because it’s behaved itself which meant euro zone finance ministers on Tuesday finally signed off on a delayed €8.3bn bailout aid tranche for Greece, ending a standoff between the country and its international creditors [the Troika] who insisted that Greece implement more tougher economic reforms. The approval of bailout funds kicked-up the Athens Stock Exchange to around a 3-year high and triggered a fall in the 10-year bond yield by 15 basis points to 6.19%, a level not seen since April 2010 – the lower yields drop, the greater Greece has a chance to return to bond markets as early as this year.
So when assessing market sentiment at the moment, financial investors appear to be sanguine about the global economy as we start the Q2 of this year; US economy unfreezing and we’ve now got a year to prepare for monetary policy tightening; deflation in the euro zone is a big concern but even bigger of the ECB acknowledges it so for now, expect forward guidance to be the ECB’s main tool to communicate to us and at the same time, data out of the region sparks optimism over the region’s prospects this year. Finally, the tensions in Ukraine which have caused a standoff between the West and Russia certainly remain a downside risk but since the peak of that crisis, tensions are easing and there is no likely threat of military action rather just a war of words. This Friday will be the first big macro release in the Q2 with US nonfarm payrolls scheduled for release – before that, we have the ADP jobs report out shortly – an indicator which is seen as a precursor to the payrolls report. Also Wednesday, we have US industrial new orders which will gain some attention following Tuesday’s solid ISM release.
Related Posts: