Since the last market update, the theme that we have been expounding on is that markets rally on better bad news. So far, the economic data is confirming this.
US retail sales in September rose more than expected, rising 1.1% month-on-month against consensus expectations of 0.7%. Furthermore, the numbers in August were revised up from 0.9% to 1.2%. Industrial production also gained more than expected, up 0.4% against expectations of 0.2%. Other data points that surprised on the upside included housing starts (up 872K against 765K units), the Philadelphia Fed survey (up 5.7 against 0.5) and consumer sentiment (83.1 against 78.3). Clearly the economic community is behind the curve.
Even in Europe where some countries are in recession, there are signs of improvement. EU industrial production in August is up 0.6% against consensus expectations of -0.5%. This came about due to a strong showing by France (actual +1.5% v consensus -0.2%) and Italy (+1.7% v -0.5%), even as Germany struggled (-0.5% v -0.6%).
China's latest data also point to the better bad news theme. Industrial production for September is up 9.2% year-on-year against the consensus of 9.0% (August was 8.9%). Retail sales grew 14.2% against expectations of 13.1% growth (August was 13.2%). Exports grew 9.9% (consensus at 5.5% and August at 2.7%) while imports rose 2.4% (consensus at 2.2%, August at -2.6%).
It may be early but we could be at the beginning of a turnaround for the global economy which has been weighed down by a recession in Europe and a slowdown in the two biggest economies. Interestingly, this improvement comes at a time when markets are struggling. Global equities and junk bonds have failed to make any headway since mid-September. Commodities are in a mild correction (down 4.6% since mid-Sep) but the US dollar index has been ranging. However, this does not change the fact that risk markets have rallied strongly since June, signaling an improvement in the global economy. More likely, markets are taking a breather before trying to make further gains. We take comfort that TED spreads, a key measure of risk, continues to fall (Figure 1).
Image courtesy of Stockcharts.com
Figure 1: TED spreads falling
ConclusionA slew of advance estimated PMI surveys will be released in the coming days. This should provide some confirmation of the better bad news theme, which will give markets another boost. Positive outlook maintained.
No change from the last update.
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