Tuesday, January 27, 2015

Global Economy Showing Some Signs of Life (excerpt)

Everyone’s been down on the global economic outlook. Both the IMF and World Bank have lowered their global growth forecasts for 2015 and 2016. There has been quite a bit of skepticism about the likelihood that ultra-easy monetary policies in Japan and now the Eurozone will do much to lift their economies. I have been skeptical as well. However, I am open to the possibility that surprises may be to the upside rather than the downside. On balance, the plunge in oil prices should be stimulative for the global economy. The same can be said for the plunge in bond yields.

The question is whether the devaluations of the yen and the euro will boost exports in Japan and the Eurozone. Maybe so, but their gain could be some other economies’ loss. In particular, US exporters could suffer if the greenback continues to strengthen. However, that could be offset by stronger US consumer spending and home building. In this light, consider the following upbeat indicators:

(1) Germany. Germany’s Ifo Business Confidence Index rose for the past three months through January from 103.4 to 106.7. That’s after falling for six consecutive months. The sanctions imposed on Russia seem to have hit Germany hard last year. Now the falling euro may be starting to boost German exports.

(2) Japan. Japanese merchandise exports (in yen) rose 2.0% m/m and 12.9% y/y during December to the best reading since September 2008.

(3) Copper. Given the improvement in US housing starts, German business confidence, and Japanese exports, the recent freefall in the price of copper may be overdone. Yesterday, it rose 4 cents to $2.54 per pound. My hunch is that the selloff may be over and the price should stabilize for a while.

Yes, but what about China? Some of the recent copper selling might have been attributable to traders lightening their positions before the Chinese Lunar New Year Holiday begins on February 19. Most businesses are shut from February 18-24; 2015 is the Year of the Sheep. By the way, Markit reported that China’s flash M-PMI output index rose from 49.9 during December to 50.1 in January, the highest in three months.

Today's Morning Briefing: Houston’s Problem. (1) Houston has a problem. (2) US oil wells still gushing. (3) Dallas Fed survey showing weakness. (4) US consumer confidence going vertically up as gasoline prices go vertically down. (5) Homebuilding boom could offset oil industry bust. (6) Is the gloomy consensus on global economy too gloomy? (7) Yergin explains it all. (8) Oil shale frackers are the new swingers. (9) The free market vs. the Saudis. (10) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

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