What Are Markets Tracking On The Macro Front?

As the global economy is struggling to recover, the economic data coming in from different countries is crucial to investors. The capital markets usually react actively to every data from prominent economies like the US, Europe, China as also the ones coming from domestic regions.

The February 2013 industrial output from the euro zone indicates a grave situation in the region. A few experts were expecting a dip of 0.1% in the industrial production while others were expecting a rise of 0.5%. The actual data is showing a fall of 0.4% indicating that the worst is not over for the region.

In the Europe (EU17 and EU27), the industrial production is down by 0.4% on a month on month basis (MoM). On an annual basis, industries have reported 1.3% less production in EU17, while that in the EU27 is down by 1.7%. Overall, in the European countries, except for the non-durable consumer goods, all other industries have reported a fall in production. The trend is no different on an annual basis, indicating the continued decline in the industries.

The two biggest countries in Europe - Germany and France - have also reported a wider fall in production indicating more potholes ahead. The region has been a drag on world economic growth from the very beginning of the debt crisis and the industrial production data shows that the recovery in the European economy will not be very smooth. A lower output means that the ECB may need to hold the interest rates at lower levels going ahead.

Another major economy (the US) on the other hand has come up with a higher-than-expected retail sales data. The US Census Bureau announced overnight that the US retail and food services sales for February 2013 were up by 1.1% on a MoM basis and 4.6% on a YoY basis. This indicates that the Americans have spent more money on shopping in February 2013 than in January 2013. This also means that the US consumer spending has not taken a hit after the social security tax was increased in January 2013. Economists in the US are encouraged by this and expect that with this retail confidence, the US economy may grow faster than expected in Q1CY13.

Earlier, the Q4CY12 earnings of the US corporates came in better than expected. The rise in employment levels also indicate that the US economy may get back on a moderate growth path. The world’s largest economy, for the fourth quarter, grew by 0.1% and it is expected that the growth rate will pick up later this calendar year.

The data clearly suggests that the two most developed regions are going in two different directions when it comes to growth.

Any data that would come in last year would put pressure on the capital markets. Things seem to have changed this year. The flash PMI of Europe released earlier this month indicated a drop in the industrial production in the region but the markets did not react to it. Now the markets have not shown any negative reaction to the industrial output data from Europe, which suggests that the worst from the continent is discounted by the markets. On the other hand, the US corporate earnings as well as retail sales and news related to the fiscal cliff are still dominating the markets.

We believe that the US will remain a key for the global economy. The US data, good or bad, will still dominate the capital markets. Anything good from the Euro region will also have a positive bearing on the markets, while the negative is mostly ignored. The markets have started tracking the domestic issues as the worries on the growth have heightened.