Markets started the new year on an optimistic footing, of that there can be little doubt. We’ve seen some double-digit gains in equity markets during January, most notably Germany (up nearly 10%) and several emerging market indices (Russia, Peru and Argentina all double-digit gains). The question now is whether the economic data is going to do its part to offer substance to such gains. The tentative answer this morning is ‘Yes’, with modestly better than expected PMI readings both in China (manufacturing holding above 50) and also in Europe, with a marginal improvement from the provisional readings in manufacturing PMI data. The biggest standout has been the UK release, showing a rebound in the headline index from 49.7 to 52.1. There have been some suggestions that we will see the UK escape a second quarter of negative growth, but it’s far too early to be taking a punt on that, especially with the balance of growth in the fourth quarter yet to be fully revealed.
We’ve pointed out before that both 2010 and 2011 started with economic data (primarily in the US) surprising to the upside, only to see a sharp turn thereafter towards disappointing releases come late February and into March. What is also noticeable is the Fed’s willingness to retain an accommodative stance on policy and keep the door open to QE3 despite better numbers of late. This all relates back to the fact that balance-sheet recessions invariably tend to be longer than others and also vs. nearly all expectations. This underpins the Fed’s actions and also recent comments last week on the matter from BoE governor King. As such, even if the mildly better tone to data continues, central bankers will be the last to get excited by it.