THE BIG PICTURE: Why we still can avoid a global recession

All of a sudden so-called “fundamentals” don’t seem to matter. That was clearly evident last Tuesday (October 4) when the US Dow Jones managed to rally over 350 points in the last 50 minutes of trade. Commentators and analysts were left scratching for reasons and all they could come up with a newspaper report that said that European finance ministers were examining ways of recapitalising banks. No decisions had been taken, but investors seemed to take the view that they had become too negative on US stocks and decided to buy, rather than sell.

But on the same day, Federal Reserve chief, Ben Bernanke, delivered testimony on the economy. And a number of economic indicators were released. But they were roundly ignored. True, Ben Bernanke provided little comfort for investors. But the economic data was encouraging. Sales at chain store sales were up 4.1% on a year ago. In Australia department store sales are flat to lower compared with a year ago. And US unemployment is far higher at around 9 per cent compared with levels near 5% in Australia.

There was also data on factory orders released on the same day. The measure that lined up best with business investment – non-defence capital equipment excluding aircraft – was up by a solid 0.9% in the month. But more illuminating were the annual growth rates. Orders are 10.1% higher than a year ago with non-defence orders up 11.2% higher than a year ago. These are hardly growth rates suggestive of an economy about to move into recession.

Earlier, on Monday this week, data showed the ISM manufacturing index lifting from 50.6 to 51.6, well above expectations. Other data showed that construction spending was up 1.4% in August while auto sales in September were up 10% on a year ago. And the ISM services index held at 53.0 in September.

While the media has tended to be dismissive of recent economic data, preferring to latch on to any bit of negative speculation it can find, more considered economic analysts are actually revising up their views on the US economy.

Respected US economic consultancy, Macroeconomic Advisers, reported “for the first time in eight months we revised upward our forecast of GDP growth over the second half, to just shy of 2.5%. This firming in near-term growth suggests reduced recession risks.”

Macroeconomic advisers then went on to assess the uncertainty provided by the Euro crisis and balance sheet effects on consumer spending and concluded “we still think a recession will be avoided.”

The week ahead

In Australia the focus in the coming week is on the job market, lending figures and both business and consumer sentiment. Meanwhile the economic calendar is more sparsely populated in the US, but there is key Chinese data to watch for on Thursday and Friday.

In Australia, the week kicks off with data on job advertisements on Monday. Businesses clearly aren’t in the mood to hire, as evidenced by job ads falling four times in the past five months.

On Tuesday the NAB business survey is released. Confidence stands at a 28-month low and business conditions are at a seven-month low. And it’s unlikely that there was too much improvement in these readings during September.

On Wednesday data on housing finance, credit card lending and consumer sentiment are all released. And while the economic readings over the rest of the week will most likely be dour, some joy may be found in the housing lending and confidence figures. Bank industry data points to a 2% lift in housing finance during August. And consumer confidence probably improved after the Reserve Bank left open the door to rate cuts.

The credit and debit card data will probably be less positive, indicating that consumers remain super conservative and are not keen to take on more debt.

On Thursday the September employment figures are released. We expect another soft jobs result with employment lifting by only 10,000 in the month and the jobless rate unchanged at 5.3%. But keep an eye on the hours worked data. Businesses are choosing to ask their employees to work longer hours rather than hire new staff in these uncertain times.

It also pays to keep a watch on two speeches by Reserve Bank officials. On Wednesday Assistant Governor Guy Debelle delivers a speech on foreign exchange markets while head of the financial stability section, Luci Ellis, delivers a speech on Thursday.

In the US, there will be little in the way of market-moving information until Friday when the retail sales and consumer sentiment figures are released. Earlier in the week, minutes of the last Federal Reserve meeting are released are Wednesday with international trade and the weekly jobless claims data slated for release on Thursday.

In terms of the retail sales data, analysts tip a solid 0.4% gain, underpinned by healthy auto sales. Still, if you strip out the car sales, retail spending is still expected to lift by 0.2% in September after a 0.1% gain in August. The consumer sentiment data will also be watched, but little improvement is likely until the European finance ministers fundamentally address their debt problems.

Also on the radar screen in the coming week is the latest batch of Chinese monthly economic data. On Thursday data on exports and imports for September are expected while inflation, production, retail spending and investment figures are due for release on Friday.

Investors may also watch for comments by Federal Reserve officials in the coming week with four speeches scheduled by regional presidents over Wednesday and Thursday.

Sharemarket

The US profit-reporting season kicks off in earnest on Tuesday when Alcoa issues its results while PepsiCo follows on Wednesday and Google and JP Morgan Chase are slated to release their latest earnings figures on Thursday. Analysts are bracing for a very mixed scorecard, mirroring the trading action on the markets.

According to FactSet Research, “As of Friday, 70 companies in the S&P 500 had issued negative earnings outlooks for the third quarter, up from 68 companies in the second quarter and 64 in the first quarter. Companies issuing positive earnings guidance have slightly declined, with 38 companies raising profit outlooks for the third quarter. This compares to 39 in the second quarter and 42 in the first quarter.”

Interest rates, currencies & commodities

All of a sudden everyone is interested in the Australian dollar. Of course the main interest is the fact that the currency has fallen and – on first glance – that suggests bad news. Well clearly it isn’t bad news. Businesses have been loudly complaining about the strength of the Aussie dollar – especially when it reached a 29½-year high of US110.75 cents on July 28. And these businesses cover a range of industries from tourism to manufacturing and rural to retail sectors.

While the Aussie has slipped to around US96 cents, and has potential to fall to US90 cents in the next few weeks, the level of the currency needs to be kept in context. Over the past three years the Aussie has averaged US89 cents and has averaged US73 cents over the past 20 years. So the Aussie is still relatively strong. Still while some celebrate the softer levels of the currency, no one should get too comfortable. China hasn’t gone away. And as long as its insatiable demand for raw materials exists, the Aussie dollar is likely to hold above US90 cents.

Our currency strategists believe that the Aussie dollar will bounce back above parity once European authorities finally take action to end the region’s debt crisis. Our strategists tip the Aussie dollar to reach US107 cents by June 2012 and US 108 cents by end 2012.

Craig James is chief economist at CommSec.