If you wish for a recovery…

Market Sense

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Recent data have brought a glimmer of hope that the recession may be bottoming out. The temptation to believe the worst is over is strong, but should be resisted, as the underlying recessionary forces are still too powerful and governments are still struggling to get the financial sector back on its feet. It will take at least a few more months before we can say with any degree of confidence that the recovery is at hand. The latest data simply confirm that the greatest risk we face is not a deeper recession, but a longer one. The Bank of England is well aware of this, and will most likely cut another 50bp on Thursday, while it launches direct purchases of corporate bonds and commercial paper. The latest data will be an important injection of confidence for the more cautious members of the ECB, but the Governing Council should resist the temptation to postpone further action, and should clarify this week its view on the desirability and feasibility of Quantitative Easing. If you wish for a recovery, prepare for a depression.

We all want to believe that the worst will soon be over, and some of the latest data provide an almost irresistible temptation for hope.. We had entered 2009 braced for the worst year on the post-war record, but it only took a few better than expected statistics to show how desperately eager we are to glimpse the light at the end of the tunnel.

January PMIs in the eurozone showed some tentative signs of bottoming out: the manufacturing index was confirmed yesterday to have risen from the previous month, and we expect the final reading of the services index tomorrow will confirm a small rebound, allowing for an uptick in the composite PMI. Even more importantly, a significant reduction in inventories points to a somewhat improved outlook for production in the months ahead. This slightly more upbeat tone was echoed in some of the EEMEA countries, particularly Poland and Russia. The eurozone EC economic sentiment index in January seemed to break its precipitous drop of the previous three months, falling by just over one point after losing 20 points in Q4-08. The picture was confirmed across most countries in the region, with Italian manufacturing confidence also slowing its pace of decline.

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Published On Wed, Feb 4 2009, 09:29 GMT

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UniCredit Group

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