Driving markets in 2012 Rhetoric or the basics?

What a difference a quarter makes?   

If you watched President Obama’s State of the Union address then scroll through the most recent statement from the Federal Open Market Committee meeting on 25 January, you would be hard pressed to find a reason not be jubilant about financial markets.  

From unemployment, equity markets and the central bank’s accommodative policies, clearly the Fed and President Obama have declared their mission. 

One thing is for certain, the Fed had no qualms in publicising their dual policy mandate.  

In an effort to maintain price stability, the committee set a long term goal of 2 per cent for inflation whilst targeting a jobless rate of 5.2 per cent to 6 per cent.  

Understandably the committee is not yet ready to declare stronger growth for the US economy as significant headwinds to the anaemic recovery is still very rampant.  


Unemployment picture  

Consider the unemployment picture for a moment.  

Year to date the trend appears to be good news for investors.  

The unemployment rate reduced slightly to 8.5 per cent in December.  

Although still very much elevated based on historic measures, some of the fundamentals are quite positive.  

The much anticipated underemployment rate which adds back temporary and part time workers seeking full time employment reduced to 15.2 per cent, while average hourly earnings and weekly hours both posted positive gains.  

Yet, you can’t help but wonder how this new higher rate of natural unemployment will impact consumer confidence and discretionary spending.  

Given the importance of the consumer to the US economy, unemployment will undoubtedly play a significant role in market direction in 2012. 


Housing market  

Similarly, the housing market has historically provided much support to the markets’ direction.  

With new home sales and home prices at such low levels, they are largely expected to stem future purchases of household goods causing a spoke in the construction wheel.  

The corollary of which will negatively impact many other sectors of the economy.  

Even considering the positive employment news, the housing market will most likely continue to be a drag on the economy over the intermediate term.  

The big elephant in the room, Europe still faces insurmountable challenges in dealing with the debt crisis.  

The public tug-of-war within the union is expected to reach new heights as rating agencies pursue unprecedented actions in downgrading member nations, further increasing political tension.  

With France losing its AAA long term credit rating while Germany maintains the much coveted status, it is difficult to envision the French taking on even more financial obligation at the risk of their fiscal sovereignty.  


Market waits  

As the Germans continue their campaign for troubled members to adopt steep austerity measures, the market waits with bated breath for the European Central Bank to finally show its willingness to use all available resources to stem the crisis.  

Without the market’s buy in, contagion risks will likely rise, threatening an already very anaemic growth forecast for the global economy in 2012 and onwards.  

Perhaps the strongest headwind to gross domestic product growth in the US is the growing conflicting macro fundamentals.  

Admittedly, some of the economic news has been quite robust. Commodity prices appear to have moderated, dampening inflation expectations at least in the near term.  

Company earnings appear to be better than forecasted with companies such as Harley Davidson reporting close to US$100 million more in profits versus the prior year.  

Apple, on 24 January, reported revenues of US$46.33 billion beating guidance of $USD37 billion, possessing enough cash to meet all of Greece’s obligations over the next two years.  

However not all the news garners such jubilation.  

Much of the federal budget cuts passed in Congress will come into effect this year.  

And, as committed as the central bank may be to stimulating the economy, the accommodative monetary stance no longer appears effective to support the level of growth needed to impact unemployment.  


US economy lacking  

With a very fragile financial sector, the US economy is still lacking a clear catalyst to drive any sustainable growth over the next twelve months.  

Have no doubt, the Federal Reserve is prepared to employ all tools necessary to stem the crisis and stimulate growth.  

It is for this reason that we remain cautiously optimistic, being mindful that any external shock could side rail the improving, albeit anaemic, economic recovery.  

If the macro fundamentals are supported by prudent central bank growth strategies, 2012 could very well be the year of turnaround to the lacklustre growth experienced over the last three years. 


Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.
Statistics Source: Bloomberg LP  


A trader works at a trading office in Paris. French President Nicolas Sarkozy secured a small boost from Moody’s rating agency following a bruising downgrade of the way the country had been handling its economy and the wider European debt crisis.