USA
While there are only a few signs of "green shoots" in the economy'safter all, most indicators continue to point to falling activity'sthere are plenty of signs of "green roots" as economic activity is nearing the surface. Last week saw a further drop in jobless claims, a smaller-than-expected drop in April payrolls, and a larger-than-expected rise in purchasing managers' indexes. The new orders components 's which tend to lead the overall indexes by a month 's pointed to further improvement in May. What makes these "green roots" compelling is that they are almost perfectly aligned with improving fundamentals.
A number of factors argue for a growth inflection in second quarter and a recovery in the second half: 1) models of uncertainty shocks suggest that the negative growth effects of the Lehman event should be fading; 2) the collapse in inventories was so spectacular in the first quarter that it is almost impossible for it to be as big a drag on second quarter growth; and 3) the stimulus from both fiscal policy and the Fed's credit easing policies should be building rapidly. In other words, the "green shoots" are being nurtured by a combination of massive fiscal fertilizer and monetary liquidity (not to mention inventory irrigation and rays of sun from the capital markets).
The debate in the market has shifted from "will we ever recover?" to "what will the recovery look like?" While all past recoveries look like a "V" on paper, the question is will we get a "real V," with 5 percent-plus growth; a "U," with 2-4 percent growth; or an "L," with virtually no growth. Historically, in the first four quarters of past recoveries, GDP growth has averaged between 1.9 and 9.5 percent. Where we land in this cycle depends on the relative strength of cyclical tailwinds and structural headwinds.
Europe
The Governing Council (GC) of the Eurosystem unveiled a series of measures which in aggregate go a little further than we had expected, suggesting that the mood on the Council is not quite as conservative as might have been supposed. In particular, it announced that:
1. It would purchase around 60 billion of euro-denominated/issued covered bonds;
2. It would conduct a 12-month refinancing operation at end-June, including at the weekly minimum bid rate (i.e. not at a premium as we had supposed);
3. Following the last week's 25 basic point reduction, the new level of 1.0 percent in the "main" policy rate (the minimum bid rate on weekly re-financings) was not necessarily regarded as being a "floor" (though it was unlikely to be lowered at the June meeting);
4. The looser eligibility requirements for collateral in its operations would be extended till the end of 2010;
5. The European Investment Bank (EIB) would become a counterparty in the same mode as eurozone banks 's therefore giving the EIB's Treasury flexibility to use the ECB's financing facilities as required for its lending programs.
Baltic Region and CIS
Russia saw two positive outcomes in April. First, CPI inflation surprised on the downside by rising 0.7 percent month on month (the lowest rate this year), taking the year on year rate to 13.2 percent from 14 percent in March. Despite the better-than-expected outcome, moderation in the April inflation number was largely due to a slowdown in private consumption spending, which was underpinned by a continued decline in disposable incomes as real wages fell and unemployment rose further. The second positive surprise came from a $16 million rise in foreign exchange reserves, the first monthly increase since July 2008. Meanwhile, the ruble continues to trade below 38 per basket since the end of April, pointing to short-term stability derived from the external sector.
Many analysts think that the recent stability in the ruble will be sustained in the near term. In contrast to the more positive developments in Russia, two leading banks (BTA and Alliance) in Kazakhstan remained in debt standstill. Both of these banks are, however, trying to negotiate debt restructuring deals.
*** Written using materials from Bloomberg and Reuters
