More glimmers of hope
NS Partners
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Recent evidence of a liquidity thaw and easing credit conditions suggests that the probability of a V-shaped global economic recovery is rising.
Consistent with a normalisation of money flows, the spread between UK interbank and government interest rates has narrowed to its lowest level since Lehman's bankruptcy last September – first chart.
An equivalent US measure, inverted, is shown in the second chart along with the annual growth rate of US industrial output. Historically, recessions have been signalled by the spread moving above 100 basis points. It reached a peak of 360 bp (monthly average basis) in October but is now back below 100 bp, supporting recovery hopes.
Business surveys are recovering, with yesterday's New York Fed survey notably stronger. This improvement was foreshadowed by a slowdown in earnings downgrades by equity analysts – third chart. Assuming that the recovery in the "revisions ratio" survives the current earnings reporting season, purchasing managers' manufacturing indices look set to revert to the breakeven 50 level, implying a stabilisation of industrial activity.
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