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. That said, confidence indicators for the manufacturing sector remain solid, especially with respect to export orders, and growth may well accelerate again in the coming months. The problems in Greece are beginning to slip off radar screens after the Greek government demonstrated a new resolve to implement necessary fiscal tightening measures.
February’s jobs report in the US indicated that underlying job growth is once again in positive territory. The good labour market numbers helped assuage market concerns about the sustainability of the upswing and boosted risk appetite. Equities have recouped their losses from the start of the year and rate spreads between Germany and southern Europe have narrowed once more.
Increased optimism has helped send short rates higher, and the 2-10Y curve has flattened on both sides of the Atlantic, though it remains very steep. Despite a modest increase, German short rates continue to trade at very low levels. The first rate hike from the ECB is not being priced in until summer next year.
Macroeconomic outlook
US indicators suggest a strong growth momentum going into 2010. While we do not expect the impressive growth of 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. Companies have almost closed the massive gap between production and demand that arose in the wake of the crisis, and further growth will have to come from rising demand. Moreover, fiscal easing will make a considerably reduced contribution to growth in 2010 compared with 2009.
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, the latest 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 weak Euro are the factors supporting industry. Investment is expected to pick up in the coming quarters, and private consumption will be helped by a stabilization in the labor market, low interest rates and tax cuts
Inflation is not giving much cause for concern in either Euroland or the US. Core inflation looks set to fall in the coming quarters due to low capacity utilization and slowing wage growth. Headline inflation will be pushed higher by commodity prices, but nevertheless remain very modest.
