Anyone reliant solely on media economic reporting to form a view of markets would be mystified by the 12% rally in world equities since early October (MSCI World index in US dollars). The commentariat, as usual, has chosen to focus obsessively on negative developments – in this case, the interminable Eurozone crisis – while ignoring important supports for the global economy and asset prices.
A key reason for doubting that the world was about to fall into an abyss was a recovery in global real money supply expansion from spring 2011, implying both a liquidity cushion for markets and stimulus for the economy from late 2011, allowing for the typical six-month lag between monetary trends and activity. Six-month growth in G7 plus emerging “E7” real narrow money fell marginally in September but remains healthy.
As discussed in several previous posts, monetary strength has been focused on the US, suggesting that economic news would surprise to the upside. Third-quarter GDP growth was a respectable 2.5% annualised and recent labour market evidence has been modestly encouraging – see Friday’s post. An improving jobs picture is also suggested by the Conference Board employment trends index (ETI), which reached a new recovery high in October. (The ETI is a composite of eight forward-looking labour market indicators.)
The Eurozone crisis could tighten US money and credit conditions, leading to renewed economic weakness next year. The latest Fed survey of senior loan officers, however, shows that more domestic banks loosened credit standards on commercial and industrial loans than tightened in the three months to October, although the balance was smaller than in August. Historically, recessions have usually been preceded by a large tightening majority.
A Chinese “hard landing” has been another favoured theme of gloomsters. The issue here is whether inflationary pressures will abate sufficiently to allow the authorities to loosen a restrictive monetary stance before the economy suffers serious collateral damage. Weekly indicators suggest that food prices are falling, a trend that – if sustained – will result in a rapid drop in consumer price inflation. (Soaring food prices accounted for an estimated 4.0 percentage points of the 6.1% rise in the CPI in the year to September.)
In the UK, pessimists expect rising unemployment to trigger a slide in housing market activity and prices, with negative implications for consumer spending. The view here remains more upbeat partly because of the demand / supply imbalance, reflected in strong growth in rents, against which house prices are not expensive. The new buyer enquiries and sales expectations balances in the October RICS survey were the highest since May 2010, consistent with a further recovery in turnover and mortgage approvals.
