February 6, 2012
Title: Firming economic data bode well for markets
The New Year has gotten off to a fairly strong start for North American equities markets, on the heels of firming economic data and positive developments on the monetary policy front. Recent moves by the European central bank in particular, have helped ease market concerns regarding the sovereign debts of Italy and Spain, this despite the recent downgrades by Standard & Poor’s of the credit ratings of nine euro countries.
The ECB has been extending loans to many of the continent’s key financial institutions, which in turn have been using the money to buy government bonds. These actions have thereby substantially reduced the possibility of an unexpected insolvency throwing a wrench into restructuring efforts, while simultaneously boosting the money supply and serving to keep interest rates down.
The US Federal Reserve has done its part too. After its most recent meeting the FMOC announced that it would keep its target range for the federal funds rate at between zero and ¼ percent. More important though, the US central bank let it be know that it extended the period for which believes that exceptionally low rates will be warranted by close to 18 months, that is until the end of 2012 (as opposed to mid-2013 as it had indicated previously.
All of this comes on top of firming economic news. US real GDP (a strong driver of global demand) increased at an annualized pace of 2.8% in the fourth quarter of last year, following a 1.8% increase the previous quarter. Job creation followed, with US non-farm payrolls increasing by 243,000 posts during the quarter and the unemployment rate falling to 8.3%.
The said, concerns remain. Many analysts have repeatedly stated their belief that recession in Europe remains imminent. In fact advanced economies as a group are likely to grow at a slower pace than they did in 2011. This will leave emerging markets, notably China and India, with the jobs of picking up the slack. Furthermore, despite all of the money being pushed out by the monetary authorities into the banks, and the vast piles of liquidity that has built up on North American corporate balance sheets, businesses remain slow to invest or borrow, fearing what will happen if things abruptly tighten up once again.
Here in Canada, job creation has weakened in recent months and the country is showing signs that its economy will not do as well as its American neighbour in the short term. Exports remain under pressure due to the continued strength of the Canadian dollar (though this is likely to be compensated somewhat by increasing demand from the United States, its largest customer). In addition the housing market and domestic consumption are both likely to soften.
That said, for the time being, the markets have been focusing on the positives, trends that in turn herald well for the New Year.
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Peter Diekmeyer Communications Inc.