Latest market developments
Generally speaking the economic data continue to point to a sustainable economic turnaround with relatively robust global growth. The US and Asia are leading the way, while the data out of Euroland have been a bit of a letdown lately. However, despite strong growth at the beginning of the year, the slightly disappointing US labour market report and unimpressive weekly job numbers have stoked renewed market uncertainty as to the sustainability of the upswing. This, combined with increasing tension around the Greek debt situation and signals of monetary policy normalisation in China and to some extent the US, has hit risk appetite. Equities have retreated to their autumn levels, credit markets have been under pressure and country spreads in southern Europe and Ireland have widened versus Germany, though the situation has reversed a little in the past few days.
German rates at the short end of the curve have been trading at record lows, though increased prospects of an intervention in Greece have pushed them up a little – as a result, the German curve has become even steeper. Meanwhile, rates on the other side of the Atlantic have also been under pressure, and the curve remains very steep. The steep curves mean it is still expensive for investors to speculate in higher rates.
Macroeconomic outlook
US indicators suggest a strong growth momentum going into 2010. While we do not expect the impressive growth of 5.7% in Q4 to be repeated in Q1, the growth rate should still be well above trend. That said, we believe that the pace of growth has peaked for now, though accommodative monetary and fiscal policies will continue to underpin the economy, and companies are still working to reduce the backlog in production, which was severely cut during the crisis.
The key to a sustainable upswing is a turnaround in the labour market, which despite the economy growing we are still waiting to see. However, more or less all the indicators suggest that employment growth is just around the corner, and unemployment appears to have peaked in the autumn. Clarification of the labour market situation would boost confidence in the sustainability of the upswing and could therefore have a substantial impact on the market.
Euroland seems to have lost some traction, though companies continue to make progress. Continuing growth in Europe’s export markets, low inventories and now also the weakening euro are the factors supporting industry. Investment is expected to pick up in the coming quarters, and private consumption will be helped by a stabilisation in the labour market, low interest rates and tax cuts.
Inflation has so far given little cause for concern in either Euroland or the USA. Core inflation looks set to fall in the coming quarters on the back of low capacity utilisation and slowing wage growth. Headline inflation will be pulled up by commodity prices, which have recouped their losses of last year, but inflation will nevertheless remain very modest in both the USA and Euroland.
