The good news just gets better.On Friday morning we had a great result for Greece, with overwhelming participation by private sector bond-holders in the bond-swap tender. On Friday afternoon, there was a great result for President Obama, with yet more signs of strength in the US labour market. Headline payrolls rose by 200k for the third consecutive month. Furthermore, whilst the unemployment rate held steady at 8.3%, household employment has grown significantly in recent months. It’s worth noting that the labour force has increased by nearly 1m over the past two months, which explains the minimal decline in the unemployment rate. What we’ve seen in the past year and a half has been very positive and has shifted the outlook from one of years of further pain to one of light at the end of the tunnel. Unsurprisingly, the greenback greeted the jobs news with glee, the dollar index up 1% since early Friday. Technically, the dollar looks in good shape; as such, it is entirely plausible that the January high of 81.78 could be tested over coming weeks should the evidence of recovery in the US continue to show.
EU builds bridges with Spain. After Prime Minister Rajoy’s defiant announcement more than a week ago that Spain’s revised deficit target for 2012 would be 5.8% of GDP rather than the 4.4% desired by Brussels, of interest has been a distinct diplomatic thawing between the two sides. Not one single European politician has berated Spain for its open resistance to the dictates of the newly-signed fiscal treaty. As noted on Thursday by Marco Buti, the head of the economics department at the European Commission, it is not as though Spain has questioned its commitment to correcting the excessive deficit, it is only really a matter of how it get there. Rather helpfully, Buti conceded that the original deficit target for 2012 was set in circumstances which were rather better than those Spain now finds itself in. As such, European leaders will likely find some way to accommodate Spain, cognisant that it remains committed to fiscal restitution and that the means to achieving the original 4.4% target would now not just be unrealistic but downright dangerous. Ultimately, sense looks likely to prevail. Rajoy is doing a good job under extremely challenging circumstances.
More easing on the way in China. The case for a further loosening of monetary policy in China continues to grow. Inflation last month fell to 3.2% YoY, the lowest since mid-2010 and down from 4.5% in January. Adjusting for the Lunar New Year distortions, inflation in January/February was around 3.9%, down from 4.1% in December. At the producer level, the inflation news was even better – prices were unchanged in the year ended February. Together with the weak export figures released informally a couple of days ago, the clear slowing of demand for raw materials, and the recent downward revision to projected Chinese growth, policy officials will recognise that there is room for some further easing of financial conditions. With inflation still on the high side at around 4%, the PBOC will likely opt for further reductions in the required reserve ratio in coming months.
Some optimism in UK manufacturing. Notwithstanding the carnage on the high-street over recent months and the debilitating effect on foreign demand caused by Europe’s sovereign debt and banking crisis, it is clear that the UK manufacturing sector is holding up rather well. Recent surveys have consistently suggested that both manufacturing orders and production are healthy. For instance, a survey just released by EEF, the manufacturers’ organisation, and BDO LLP, showed that demand both at home and abroad has improved over the past three months, forward order books are strengthening and output levels are respectable. Although confidence is reasonably upbeat, and some companies are looking to increase both recruitment and investment, there is still underlying recognition of significant financial challenges both at home and abroad. One factor that is really helping the manufacturing sector is improved competitiveness. A cheap exchange rate is certainly helpful in that regard, as is relatively low wages’ growth. Just this week, Nissan announced that it would be building one of its new compact models in Sunderland, adding to the Japanese manufacturers’ already sizeable presence there. Last year, nearly 500,000 vehicles were produced at the plant. Do not be surprised if the UK manufacturing sector continues to generate decent growth this year. Should it do so, that ought to give the pound a boost.