This week’s thought-provokers for investors:
Posted on:
27
Jan
2012
by James Cholmondley Farmer
The Fed inspired investors, pledging to keep rates low for a longer period of time. Yet the initial enthusiasm cooled down after mixed earnings reports and weaker-than-expected US home sales figures. Except for the Swiss market, all equity markets are in positive territory for the week. Emerging markets are leading the field of positive performers. Ten-year government bonds continued to drop, leading to higher prices across the board. Crude oil is trading below USD100/bbl and gold has stabilised above USD1700/oz. The Swiss franc continues to hold steady above 1.20 against the euro.
After the two-notch downgrade by S&P, Italy placed EUR500 million of inflation-linked securities. The target was to place between EUR250-500 million. The yield of the two-year zero-coupon bonds issued dropped to 3.76%, almost one percent below the December yield of 4.85%.
The auction shows that the downgrade was expected and that market participants are getting more confident in and accustomed to the current situation.
The German January Ifo survey painted a stable picture of the German economy. The overall business climate indicator increased from 107.2 to 108.3. This was ahead of consensus of 107.6. The major driver was a pick-up in business expectations, which are clearly improving. It was the third consecutive increase in the Ifo index.
This latest data shows the growing contrast in Europe. The indicators for the peripheral states point to a recession, whereas moderate growth or stagnation is in the cards for Germany. Nevertheless, German growth will not be enough to compensate for the negative impact of the periphery.
The eurozone composite Purchasing Managers Index (PMI) increased to 50.4 from 48.3. A PMI reading of above 50 is usually consistent with a pick-up in activity. The increase was larger than expected. A rise recorded in Germany and France supported the index. Overall the manufacturing and the services sub-indices posted solid increases across the board. The export orders index showed a sharp increase.
The increase in the PMI is encouraging, but the index is below the level of the US and UK indices. This shows how the uncertainty created by the European debt crisis is weighing on the economy.
US durable goods orders increased by 3% in December, beating forecasts. Aircraft, autos and business equipment were the major drivers. Non-defence capital goods orders (ex. aircraft) increased by 2.9%. Economists projected only a 2% increase in demand for durable goods. The November gain was revised to +4.3%, more than previously estimated.
The data suggests that production will stay strong in the coming months. Sustained demand from emerging market economies is apparently helping to compensate for the impact of the slowdown in Europe.
The Fed announced that rates will be on hold until late 2014. This was the first set of interest rate projections published by the Fed, marking a change in the way US monetary-policy makers conduct policy. In the statement published by the Federal Open Market Committee (FOMC), policy-makers say they still detect significant downside risk to the economic outlook, despite positive signs evident in the reported economic data. The committee will retain its highly accommodative monetary policy. With this step, the Fed has paved the way for low rates until late 2014 and at the same time announced an inflation target of 2%.
The announcement of a long-run inflation target is an important change and binding for the FOMC also once Fed chairman Ben Bernanke leaves. It is interesting to note that Bernanke has finally succeeded in getting the FOMC to adopt inflation targeting, a doctrine he himself developed in the late 1990s. The new manner of communication will increase transparency and should diminish uncertainty, which in turn will improve market confidence.
The International Monetary Fund (IMF) warned on the debt crisis and cut its global economic outlook. It revised down global growth expectations by 0.7% to 3.3% for 2012. The IMF expects the eurozone economies to enter a mild recession and warns that a failure of the euro could prompt another global recession like after Lehman Brothers in 2008. Further, it urges policy-makers to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation. The IMF urged the other major advanced economies to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery.
It is no surprise that global growth will be lower than previously forecast. Also, the measures identified by the IMF to rein in the crisis are not new. Yet one message is very important, “… not all countries should adjust in the same way, to the same extent, or at the same time, lest their efforts become self-defeating.” It is particularly Europe that must take this message to heart.
Tags: IFA | invest | rdr
