Well we knew it couldn’t be that easy and yesterday’s move to the upside for risk appetite has been quelled slightly this morning. In other words, we are pulling back from the highs as the market has taken its foot off of the gas—for now. This is not surprising as there will likely be volatility as the market digests new information and decides which way it wants to go to start the year. There is seemingly to me a bias to the upside, so that gains can be booked early as the year unfolds.
There are two basic economic stories that we are following this year: the Euro debt crisis and global growth. Global growth can be measured by the scheduled economic releases we receive on a daily basis, but the Euro debt crisis is going to be more prolonged and will be more market-driven so will be much harder to gauge.
That is what we are seeing this morning after a German bond auction came in with slightly lower demand than average, and the EFSF plans to auction off bonds tomorrow to help support the bailouts. In the meantime, consumer spending in France declined as higher unemployment created uncertainty. The Euro zone CPI estimate was lowered from 3% to 2.8%, which may give the ECB some room to potentially cut interest rates again.
And this is going to be the issue all year long. Essentially the ECB and the various bailout funds are in a race against time to get debt refunded before interest rates move too high to make the debt service impossible. This is why the markets were so disappointed last year with the lack of solutions coming out of the EU as while nearly everyone enjoyed the benefits of the union, no one wants to help out when the chips are down.
If the Euro zone leaders came out with a “bazooka-like” program like the one here in the US when we had our banking crisis, then the bond vigilantes would be too scared to force higher yields. But the lack of conviction in the EU has allowed the market to control where rates are going and this is potentially disastrous for the debt-laden countries.
So the debt crisis will likely be the elephant in the room for some time until something comes to a head, which may not be great for global economic hegemony. There is an overwhelming feeling that the Euro zone will slide into recession at some point this year and the impact on the overall global economy is unknown.
In the short-run, the economic data continues to come in better than expected which is positive but highly uncertain if this is a trend reversal or merely just a blip. One of the catalysts for this improvement has been easy monetary policy from Central banks around the globe, most notably from the US Fed.
Yesterday, the minutes from the most recent FOMC meeting were released and the push for further “transparency” was made. We learned two basic things from the release yesterday, the first being that the Fed is now going to release its forecast for the Fed funds rate which is basically going to take some the impact away from the actual FOMC rate decision by essentially telling us exactly what they are thinking. It will be interesting to see if that pre-announcement induces the same sort of volatility that the actual announcement does. The second thing we learned is that some members of the committee are still favoring further monetary easing if appropriate, which given recent history could mean throwing additional money at the slightest perceived economic downturn.
Later this morning US factory orders are expected to rise 1.9% to four-month highs. This is definitely possible after yesterday’s ISM manufacturing numbers came in better than expected. So the data is improving and Friday’s NFP number may also surprise to the upside, though I discussed the fallibility of the January figure in yesterday’s article.
A familiar pattern is starting to emerge, with risk appetite starting out early in the year and then the hope that the markets can hold on to gains as the year unfolds. There will be many turns and bumps along the road this year for certain, so it is important to stay on top of the market moving news that can affect global economic sentiment.
