USA
The U.S. data flow has shifted from unrelenting bad news to rays of hope. In the past week, ISM manufacturing, construction, pending home sales and vehicle sales have exceeded beaten down expectations. The pickup in the new orders component of the ISM report was particularly notable. The major exception to this tentative improvement is the continued collapse in the labor market. The headline numbers in the March employment report were as expected: payrolls fell 663,000 and the unemployment rate rose from 8.1 percent to 8.5 percent.
The devil was in the details 's payroll employment for January was revised downward by 86,000 and now shows a 741,000 drop; the unrounded unemployment rate was 8.54 percent; the household survey measure of jobs fell 861,000; and most importantly, the work week slipped again from 33.3 to 33.2 hours. Overall, the report suggests downside risks to the -5.5 percent first quarter GDP growth forecast. Aggregate hours fell at an annualized quarter on quarter rate of 8.7 percent in the first quarter, easily surpassing the 7.4 percent drop in the fourth.
This shows up in GDP through aggregate spending, which is actually looking a little better than expected. In particular, recent consumption data suggest some upside risk to the 1 percent first quarter forecast. Hence, if the labor market weakness shows through in the GDP, it will probably be in a bigger drop in inventories. With parts of the economy improving but jobs still collapsing, a natural question is whether jobs are merely lagging behind the rest of the economy 's indeed, this is a common view in the business press. If that is correct, then as long as the rest of the economy is improving we can ignore the bad job numbers, which they turn around later.
Europe
This week's ECB press conference was the most enigmatic yet. Key policy rates were cut across the board by 25bp, but there were also hints that the refinancing rate would be cut by another 25bp in a month's time. The decision was "by consensus," but no-one apparently opposed the easing 's implying that there were voices for stronger action. There was agreement that at next month's meeting new "non-standard" measures would be announced, but no real clues as to what they could entail (other than a signal that the Council was highly conscious about the need to maintain trust in the euro 's a hint, it seems, that an aggressive purchase program to ramp up the money supply is not regarded currently as a likely near-term initiative).
Meanwhile, the Introductory Statement was very little altered, providing few clues as to whether the Council's view has shifted. Many analysts are inclined to think that some on the Council are likely to be 'playing for time.' During the last week, more signs of recovery have emerged. In particular, based on ISM/PMI data, the gap between the new orders and inventory diffusion balances has become notably more positive, implying that business confidence itself is set to improve significantly in the months ahead. Auto sales have rebounded in the U.S. and Europe. Equity markets, which have been a surprisingly good indicator of the global business cycle during the past four decades, have also shown a substantial rally from their lows.
Russia and CIS
Russia seems to follow the common growth oriented trend. The country's external accounts are bringing positive news for continued ruble stability and outperformance of the credit asset classes, at least in the shorter term. FX reserves are now holding quite well after the recent sharp decline. Reserves have increased by $11.9 billion over the last two weeks. Moreover, in the fourth quarter of 2008 Russia's external debt declined by $57.4 billion to $484.7 billion (29 percent of GDP) after increasing in the first three quarters of 2008. For the real sector, March's PMI reading of 42 may be the first indication that conditions are starting to turn more favorable. Despite being considerably short of the magic 50, the figure is well off the 34.4 low of January and is trending higher.
*** Written using materials from Bloomberg, Reuters, and Barclays Capital Economics Research
