Overview
Our last issue pointed to indications that we might see weaker economic data ahead, driven or aggravated by seasonal distortions. That has indeed come to pass, raising concern with investors. Financial markets have also been shaken by political uncertainty, particularly in Greece, where the May election led to a stalemate but clearly displayed voters’ unhappiness with the pain of austerity.
Commodity prices have fallen, harmed by these events and supply-demand fundamentals. Although sowing the seeds for improved global growth, it also shifts resources from commodity-producing nations to commodity consumers. Overall, the world is better off, but this dislocation also fosters uncertainty, even if temporary
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
Commodity prices have continued their downward trend. In the last few weeks, even oil and gasoline prices – the last “hold-outs” with rising prices – have fallen precipitously. This brings this important “causal” factor for financial markets into the positive camp along with most other fundamental factors we feel are key, such as monetary policy. Having said that, many investors are interpreting lower commodities as a sign of weakness in demand, making markets volatile.
Since U.S. causal factors are largely in the positive camp, we’re focused on the key remaining negatives, including European austerity and threats to the eurozone currency, slowing emerging economies and an earnings plateau in selected U.S. sectors. As we mentioned last month, we’re also seeing some seasonal volatility (an early Easter, distorted seasonal factors and a mild winter, which accelerated some activity to usually slow winter months), making data particularly hard to interpret.
Japan
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
Economic fundamentals have weakened slightly in Japan, as exports remain at 2010 levels. Growth in exports has come from demand in the U.S., with Asia and the E.U. both showing declines from last year at this time. Manufacturing also remains relatively flat to slightly weaker, as do machine tool orders, which correlate well to GDP or economic growth. Consumer fundamentals are mixed, with retail sales showing some improvement, while household spending continues to struggle.
While deflation (a decline in prices) is showing moderation, various indicators point to continued price declines for the remainder of 2012. The yen remains strong, placing a burden on exports.
Europe
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
While the eurozone narrowly avoided a recession (technically, two successive quarters of negative GDP) when it reported preliminary first-quarter GDP growth of 0%, it’s in one for all practical purposes and several indicators are pointing towards a still-weak economy and/or display the downward bias started in 2010.
New political leaders were elected or appointed in France and Greece, as platforms shift in support of less austerity and more economic growth through some sort of undefined stimulus. The new President of France, François Hollande, is now getting first-hand insight into German Chancellor Merkel’s opinion on the importance of fiscal discipline. In the meantime, the Greek vote was so fractioned that a prime minister was appointed as a caretaker until another round of elections can be held in June. Rhetoric about Greece leaving the union has resurfaced with vigor and is one reason the Euro has lost ground to the U.S. dollar in recent weeks.
UK
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
The UK appears to be in a recession, after two quarters averaging close to a -1% pace. Impacted in part by the problems in the eurozone, the UK has experienced softer economic data in recent weeks, with a rising Sterling hurting exports, lower housing valuations and lower – if still positive – surveys of purchasing managers.
While retail sales for March looked strong, a deeper look questions whether the month/month gains posted may have been a rebound effect after a weak February report. Employment continues to improve slightly as the number of individuals seeking unemployment payments moved lower and the unemployment rate improved from 8.3% to 8.2%.
Emerging Markets
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
Typical of transitions, we’re seeing both positive and negative news in the same economies. A reader of data releases can observe, on the same day, how Chinese steel producers are rumored to be slowing cargoes – presumably due to slowing demand – while China’s leadership provides markets with commitments for the monetary and fiscal policy stimulus needed to ensure growth.
Long term, emerging nations continue to have great opportunity. Their problems now seem “run of the mill” – not unlike what developed nations have experienced for decades. This is a significant improvement from the crisis management more typical of the 1970s–1990s period and suggests a maturity in public policy that will serve its citizens and financial markets very well, if upheld.