HOPES of an economic stimulus lifted US stocks to their highest levels since the 2008 financial crisis, but stocks cannot live on stimulus alone.
By Thursday, there will be nowhere left to hide from economic reality.
Last Friday’s jobs report rubbished talk that the US had dodged the economic slowdown. Recent manufacturing data from China, Germany and the US suggested that the euro crisis has acted like a stick in the spokes of the global economy, and the jobs data confirmed it. The 96,000 net workers added to payrolls in August was one of the slightest increases in the labour force since the recovery began three years ago.
The silver lining in the report was the likelihood that it would prompt another round of bond buying from the Federal Reserve at its meeting on Thursday.
After the US data, analysts and bond markets shifted the odds of some form of stimulus appearing in this week’s policy statement to a near certainty.
After all, 10 days ago, Federal Reserve chairman Ben Bernanke explicitly stated that the central bank would intervene again if the jobs market deteriorated, which it clearly did in August.
Quincy Krosby, investment strategist at Prudential Financial said that there had been rumours of a globally coordinated stimulus package in the wake of Mr Bernanke’s Jackson Hole speech. Within a week, European Central Bank (ECB) president Mario Draghi had lifted global markets by vowing to buy short-term bonds of euro nations. A day later, China’s government drove a rally in manufacturing and mining stocks as it issued a plan to spend billions on new bridges, roads and subways. If Mr Bernanke followed up with his own ambitious programme on Thursday, it would lend credence to talk of such coordination.
But the Fed may not be quite as fast to act as the rumours suggest. The last time that Mr Bernanke unveiled a bond-buying strategy during the annual central banker retreat in Wyoming, Ms Krosby noted, the implementation did not come for three months.
Aside from the possibility that the Fed will disappoint the market by delaying QE3, some analysts say that the market is losing faith in quantitative easing altogether.
“QE3 won’t bolster our economy. It won’t weaken the dollar. But it will make gasoline and heating/
cooling prices surge,” said Chris Faulkner, chief executive of Dallas energy exploration company Breitling Oil and Gas, in an e-mail commentary.
The stimulus packages may be too late to save economic and corporate-earnings growth in the second half of the year, said analysts at Goldman Sachs, in another research note. On average, Standard & Poor’s 500 companies grew revenue at a 3 per cent rate in the second quarter, compared with a 7 per cent average since 1968. Consensus Wall Street estimates suggest that growth will slow further in the third quarter. Goldman economists project a “real” gross domestic product quarterly growth rate of 3 per cent or less persisting until the end of 2013.
“A recession in parts of Europe and painfully slow economic growth in other developed economies could become a broader global recession, regardless of whatever stimulus central bankers introduce in the coming weeks and months,” said John Kozey, a Thomson Reuters analyst.
The only hope left for the global economy is the prodigious appetite of the US shopper.
At a Goldman Sachs conference attended by 31 publicly traded retailers, the majority anticipated improvement in the second half of the year, according to a research note from the broker. Plus, most of the stores described back-to-school sales as “robust”. So the Commerce Department’s reading of retail sales this week will likely show that July’s growth carried till to August.
A consumer credit tally today may determine whether that growth can last, said Joe Kinahan, chief derivatives strategist at TD Ameritrade, because in the absence of income growth from expanding employment, the only way that Americans can increase spending is through borrowing.
On the charts, the stock market looks the best that it has all year. The broad S&P 500 is standing at its highest level since the summer of 2008, as if finally able to move on from the death of Lehman Brothers. For the first time in years, the financial sector is a clear leader. That’s important, said TD Ameritrade’s Mr Kinahan, because the banks often decide the course of the whole market.
The main reason that the banks are rallying is the hope that Mr Draghi’s bond buying plan will stabilise the euro once and for all.
The German high court is likely to strike down the constitutionality of the eurozone bailout fund that is a key part of the plan, warned analysts at brokerage Credit Suisse. While Mr Draghi or German Chancellor Angela Merkel may still have leeway to get around the court, the ruling could be a reminder of the broader debate about the pros and cons of quantitative easing.
This could be the week that the market stops believing in the power of stimulus.
By: Rob Curran