Causes of the Budding Recovery

The cheers in the market is based on forward looking indicators, in particular: the declining inventories, the PMI reported in a number of countries, the equivalent of the ISM index in the US, and rising factory orders.

China had been the first to report PMI above 50, and that was for March this year, 50 being the demarcation point for expansion versus contraction. In April it rose further to 53.5 percent, up 1.1 percentage points.

Now the PMI (manufacturing) in Canada also shot beyond 50. The Ivey Purchasing Managers Index rose to 53.7 in April from 43.2 in March, and that is quite a leap!

In the UK, the services PMI rose from 45.5 to 48.7 in April, the fifth increase in a row, now barely below the technical expansion/contraction mark of 50. The manufacturing PMI in April rose to 42.9, while the construction PMI jumped to 38.1 in April from 30.9 in March, against market expectation of 31.9.

The US Institute for Supply Management said its index of national factory activity rose to 40.1 in April from 36.3 in March, again higher the median forecast of 38.0 among economists polled by Reuters. The services index rose to 43.7 in April, beating expectation of 40.8.

Similar good news are reported across many other countries, among which Australia just reported employment growth for April at 27,300, in contrast to market expectation of a decline in employment of 25,000; while German factory orders in March rose 3.3%, against an expected decline of 0.6%

Skeptics are bewildered by the sudden pervasiveness of good news, even though unemployment is still rising and foreclosures are still at historical highs.

Just as the winding down of the economy was a result of the dynamics of mass psychology interacting with some key events that triggered a domino effect working through the economic system against a background of many smaller bad news that add up, so the pending recovery of the economy is counting on the cumulative effects of stimulative policies that gradually build up to the trigger point that changed mass psychology around.

And the stock market, the bond market, the foreign exchange market, and the goods and services market, are all reinforcing an upward spiral that will eventually end the housing slump and improve the job market.

The interest rate declines and the quantitative easing on the one hand, the recapitalization of key financial institutions on the other hand, have helped boost market sentiments and stabilized markets, and finally brought down mortgage lending rates significantly.

The commitment of governments not to let any major financial institutions fail and the proposed lifting of toxic assets from banks act as circuit breakers, to prevent housing market declines to worsen the balance sheets of banks and then lead to a credit crunch. The fiscal stimulus packages announced around the world further boosted confidence, even though in the US only a fraction of the proposed fiscal spending increase had come through.

But when fear turns into cheer, the vicious circle is being reversed and transformed into a virtuous circle. Just as many relatively small damages snowball and magnify through a multiplier effect, so do the improvements.

As sentiments improve, the US dollar started to ease, and the Japanese Yen also eased, providing impetus to the manufacturing sectors of these two major economies. Although employment is a lagging indicator, I shall not be surprised if the job declines swing around to become job increases around year end.

Comments

[Analyste de...:]

Very well-reasoned, well-written summary which explains the 'green shoots' outlook. Thank you!

May 07 12:41 PM

[Mutual Fund...:]

Very interesting piece Lok Sang Ho. Your article and my weekly posts concerning top performance sectors of the global market place seem to compliment each other, although yours contains much more detail. Specifically, I am referring to increasing value of global equities ie: China, financial services and real estate equities. I certainly enjoyed your page, hope you and your readers take the time to peruse www.mutualfundwealth.com/

May 07 02:22 PM