Monday, 9 January 2012
Euro growth. US Data. New kind of risk. Euro down
Economic data from the Euro-zone
Rather bad data from the Euro-zone were published on Thursday and Friday. Retail sales fell by 0.8 per cent in November and economic (consumer) sentiment fell half a per cent in December while business sentiment has been picking up. Unemployment rose by 45,000 in November. Even if the numbers are the most recent, they are not up to date, and that is important for understanding them. Inflation continued to fall.
I do not think that those numbers are harbingers of harder times ahead. But they are a confirmation that the Euro-zone stalled sharply in Q4, fully in line with our claim that the maximum downward pressure is just behind us. We will still see bad numbers in Q1 but they will not fall as sharply as in Q4 and a stabilisation will be visible around the turn of Q1-Q2.
It means that I am not in line with those who only now begin to forecast a European recession. They are too late. The recession is a fact. The next game in town is to figure out when the recovery will begin, however anaemic.
While we think of that one, it is worthwhile remembering that the financial markets react to perceived changes in trends and growth. For those who still remember their high school math, it is not the first derivative (growth rates, inflation) that are interesting, it is the second derivative.
Economic data from the US
The US entered the “soft patch” at the end of Q1 2010. In August, when the stock market found out, the economy was about to move on. It stabilised in Q4 and is now in recovery. Even that most unreliable of American indicators, unemployment, is falling (just in time to improve Obama’s possibilities of being re-elected?). It is in line with our forecast from August and so far we see no signs of that recovery faltering.
A new kind of risk
What a joy to work in a profession that is so flexible as to invent new terms when the old ones are not any longer adequate. After having complied with European standards when writing the prospectus for out new fund (Origo Total Return Fund), I thought I knew every kind of risk relevant to the financial markets. But no. Now there is a new one that has established itself over the past months. It is called “Headline Risk”.
Don’t try to find it on Wikipedia - it is not there (even if Investopedia has an entry). It simply covers the situation that occurs when market participants show up in the office and a headline carries news about a story that the said market participants did not even know existed. How did we manage before we invented Headline Risk?
Euro is falling
Personally I am happy about the “Headline Risk” undermining the Euro. I see that some strategists now predict a collapse to the region of 1.25 against dollar. Wow. Let us get that euro weakened so the Euro-zone can regain some of that growth that went to other regions as the Euro strengthened because the ECB was slower out of the starting blocks than other central banks. 1.00 against USD would be a huge advantage for our exports.