Notwithstanding the general mood of optimism surrounding US recovery prospects, there is one recent development that needs to be watched closely. If the US economy is to reach a point whereby it becomes self-sustaining, then a critical ingredient will be decent growth in business investment.
Since late summer, the pace of growth in private capital spending has stalled, as proxied by non-defence ex-aircraft capital goods orders. That said, the actual value of capital goods orders is currently consistent with that which prevailed in the first half of 2008 before the GFC. Part of the explanation for the slower growth in capex lies in the maturation of the inventory cycle.
In addition, some investment spending was clearly brought forward ahead of January’s halving of an investment tax credit. More encouragingly, a survey of US executives in the manufacturing and services sectors (conducted recently by KPMG) generated record highs in terms of optimism regarding revenues, profits and new business.
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US service sector companies are overwhelmingly bullish – 96% of US executives in this sector expect hiring to remain the same or increase this year. Attitudes to capital spending are also very buoyant in both sectors. Should the outcome of this survey actually be replicated out there in the real economy, then the prospects for the US economy look (at the very least) quite sound, with the potential to surprise on the upside.
Yet more euro short-covering. The process of covering the mountain of record euro short positions, which commenced in earnest during February, has continued during the current month. That said, judging by the extent of short positions still held by both traders and hedge fund managers, we could yet see more of this type of activity in the weeks ahead if Europe remains as benign as it has done recently. Against the backdrop of yesterday’s bold declaration from Italian Prime Minister Mario Monti that Europe’s debt troubles were “almost over”, some of those remaining euro shorts were minded to close out more of their positions yesterday. The single currency did reasonably well against the other major currencies yesterday; for instance, EUR/GBP was 0.5% higher at just under 0.84 and EUR/AUD cracked 1.28.
The pressure on UK households. Behind the small downward revision to Q4 GDP in the UK (from -0.2% to -0.3%) is a picture of a household sector still under immense pressure from both modest income growth and rising inflation. Real household disposable income fell 0.2% in the quarter, extending a run which has seen declines in five of the past eight quarters. On a per capita basis, real disposable incomes are now more than 3% lower than their peak in 2009, again a reflection of both squeezed incomes and high inflation during this period. With consumption growing for the first time in five quarters, there was a slight fall in the saving rate (from 7.9% to 7.7%). The data underlines the ongoing squeeze that households are still facing in the UK. Will things be better this year? There are signs that they should be, but any improvement will be modest. The anticipated fall in inflation is likely to be slower than was thought at the start of the year and the pace of improvement in the labour market is fairly slow. The debate will now shift to the question of whether growth will turn positive in the first quarter of this year, or if the UK will officially enter recession. The PMI data for the quarter suggested a better outturn, with the trade data released to date also suggesting a modest improvement. As for the currency, sterling has held up well, at least vs. the dollar in recent days, but EUR/GBP saw some decent bids yesterday, nudging this cross to near a two-week high. The prospect of further QE remains and this is likely to be seen as a restraining factor by many.
A bumpy time in China. China, the main man in the global economy over the last few troubled years, is definitely feeling the pinch. Witness the continuing decline in Chinese equities, with the Shanghai Composite Index (SCI) down another 2.7% yesterday to its lowest level for seven weeks. For the year-to-date, the SCI has managed a small advance of just below 4%. Chinese equities are dragging the chain vis-a-vis other members of the BRICs – the Sensex is up 11% this year, the Russian MICEX is up 9%, and the Brazilian Bovespa is 16% higher. If we run the comparison back to the end of the previous bear market in March 2009, Chinese stocks have been a financial calamity in relative terms, with the SCI up a mere 37%, versus nearly 200% in Russia, and 124% in both India and Brazil. Some would argue that a fairer comparison is to use the Hang Seng China Affiliated Index, but even this index has essentially gone sideways for the past three years. Yesterday, the trigger for further losses was growing concern over the outlook for corporate profits and a sharp fall in reported earnings at the largest copper producer, Jiangxi Copper. Steelmakers in China recorded losses in the final quarter of last year. According to the National Bureau of Statistics, profits at industrial companies fell 5.2% YoY in the first two months of 2012. It cannot be long before policy-makers in Beijing respond to the falling market and weakening economy with further stimulus measures.