By Samuel Harrison – Current MIF student
Yesterday the MIF class attended the latest in the series of macro and economic update hosted by Professor Ignacio de la Torre. All the prevalent hot topics in the economy today were analysed, broken-down and discussed.
The good: In reflection, most of today’s positive economic news is coming from the USA. Economic data has remained strong and inventory levels are at historic lows of 0.8, which is a positive leading indictor. Thankfully then, GDP forecasts have remained resilient. Investors will be letting out sighs of relief, as it appears the US will not be heading into double-dip recession, as had been previously feared.
The US job market also has seen improvement, as we examined initial jobless claims, which have almost halved since January 2009. This has mainly been driven by the strong profits that US companies have been reporting, which has led to robust hiring. This phenomenon has been further supported by a resurgence in “insourcing” as economies of production worsen in China and other EMs and US begins to re-import production facilities again. Strong employment data means improving consumer confidence and as a consequence, strong consumption figures. US CPI has begun to rise as a result of the above, which although somewhat circumspect, looks stable and is expected to be unproblematic in the near future. Indeed, at current levels, inflation will help the US to ‘inflate-away’ its massive accumulated debt (a tried and tested method to erase public debt).
The bad: Negative news continues to flow from Europe, where ongoing uncertainty continues to impose pressure on financial markets. As a result; Italian, French, Spanish, Greek and Irish bond spreads over German bunds continue to rise at alarming rates, with Italy under the spotlight, suffering particularly from liquidity problems. Markets fear that Italy’s liquidity squeeze will transform into a solvency problem, much like Greece is suffering from.
European PMI’s are also pointing to a recession within 6 months, a message that has recently been echoed by the Bank of England’s governor, Mervyn King, who also warned of impending recession. Other weaknesses examined include the impending end of the Chinese real-estate bubble, which as been responsible for roughly 50% of China’s raw materials imports. This has led to knock-on effects on global freight and commodity prices, although this was widely anticipated by the markets. Chinese export growth has also been weak, at levels untested since Q4 2009, which we highlighted as the main reason for its weaker PMI figures. Investors will remain particularly alert to impending events in China as we lead up to a succession in leadership (Xi Jinping) in 2012. The investment community is hoping (praying) that that China’s economic and consumption revolution will continue to march onward…
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