EmailThe hopes that central bank action will offset the impact of increasingly poor global economic conditions are hanging by a thread.
Retail sales data for the euro-zone fell 0.2%, with significant weakness in Germany. Manufacturing data across the region also reveal contraction. The semantic myth that the euro-zone isn't already in recession (simply because the change in first quarter real GDP was 0.0% sandwiched between fourth and first quarter declines) is imploding.
Further bad news come from reports that capital is fleeing Spain and the banks are getting weaker. Yet, somehow, these fundamental facts are considered either inconsequential or even beneficial - because economic weakness will lead to monetary stimulus. The Spanish stock index is up 0.5% today and the 10-year government yield is down 0.01% to 6.56%.
The tone in the S&P futures isn't quite as sanguine. Indications are for a down open of about three points. FedEx lowered its earnings guidance because of weak global demand. This company has a pulse on corporate activity, and this warning should not be taken lightly. It reflects the spreading global economic slowdown that is accelerating.
There is some good news. August auto sales were surprisingly strong. The economic impact is offset, however, by yesterday's very poor construction spending and ISM data. The US economic trends are weak and the Briefing.com model suggests a sub-1% third quarter real GDP gain. Not good.
The stock market is proving surprisingly resilient to the onslaught of bad economic data. The European Central Bank (ECB) meets tomorrow and there are hopes for an announcement of some sort of plan to buy government (Spainish and Italian) bonds. Such action could indeed reduce downside risks for those credit markets and economies, but it is a pipedream to assume that any ECB stimulus will renew euro-zone economic growth.
The stock market continues to be supported by the idea that increased liquidity from central bank actions will lift financial asset prices even while economic and earnings trends deteriorate. That is a fragile foundation for long-term investing.
Founder and Chairman, Briefing.com
