Kaboom! Wham! Pow!
No, it’s not a scene from the 1960s Batman series, it is global markets which are reflecting the extent of the upside risks to the global economy that keep being reinforced in an unrelenting set of economic indicators. These indicators continue to exceed the expectations of just about every forecaster, including the optimists.
The US markets and with them, the economy, are recovering at a rate to inspire confidence that the world economy will be in a good place in 2013, with growth and job creation the order of the day.
With monetary policy already easy in Australia and fiscal settings unlikely to be tightened much more from an already restrictive stance, we are likely to see economic activity locally start to accelerate from the first quarter of 2013.
The latest news from the US shows that jobs are being created at a decent clip, wages growth is edging up and manufacturing activity continues to lift to levels consistent with a strong overall level of GDP growth.
What is even more compelling is the boom in share prices, the back-up in government bond yields and the fact that there's finally some traction in the lift in commodity prices.
The Dow Jones Industrial average is above 14,000 points to be a smidgen from a new record high. It has risen a wallet-numbing 110 per cent from the 2009 low. The story for the broader S&P500 is even more compelling – it is up nearly 120 per cent from its 2009 low and is just a couple of per cent from its new record high. Stock markets don’t trade like this unless investors are banking on stronger economic growth and with it, good corporate earnings and rising dividends.
The 10-year government bond in the US is now over 2 per cent, a significant jump from levels below 1.5 per cent during 2012. And it's a level that is only this low because the US Federal Reserve has purchased close to one-third of the stock of these bonds on issue through its quantitative easing. This move is significant as the market is starting to gear up for inflation risks as the economy picks up.
It is not just the US where the recovering is rapidly unfolding.
The various purchasing managers indexes around the world are showing unambiguously favourable news. In China, the manufacturing PMI was firm (it dipped 0.2 points) but this minor noise was swamped by the strength in the PMIs of the US, Europe and a range of other countries.
According to the JP Morgan calculations, the global PMI rose to 51.5 points in January from 50.1 points in December. This was the highest level for the index in 10 months and encouragingly, the sub-indices on the outlook for output, new orders, input prices and employment were all stronger.
In this climate, it is little wonder global stock prices are on a rampant bull run and the market positioning is rapidly moving to higher risk, higher return (and potential loss) assets.
All of this is a clear reflection that policy, especially monetary policy, works. The big central banks in the world have interest rates at, or frighteningly near, zero. They have also embarked on unprecedented quantitative easing and have signalled they will keep doing so until their economies are fixed.
Who wouldn’t buy stocks in this environment? Why wouldn’t there be an economic upswing in the offing?
Of course, there are hurdles ahead, including in the US. Indeed, the 157,000 lift in US employment in January means that only 5.5 million of the 8.7 million jobs lost during the recession have been regained and the unemployment rate, at 7.9 per cent, is still a long way from the 4 per cent level experienced at the peak of the last cycle. At the current rate of job creation, it will still be close to two years until the number of jobs lost during the recession have been regained. Clearly, a year of 250,000 new jobs per month is needed to lock in the good times.
In the interim, the markets are priced for a period of better growth, some upside to inflation and the continuation of very easy policy settings. It just might pay to go with the trend until the world’s major central banks talk about ending the easy stance of policy, whenever that may occur.
All of this suggests an interest rate cut from the Reserve Bank tomorrow is not on the agenda. Indeed, the bank may not even have a particularly dovish take on the monetary policy outlook given the U-turn in global growth and markets. But I will cover that in tomorrow’s column, which will preview the Reserve Bank's decision.