>MACRO STRATEGY: Draghi-ng the market back from the edge

■ Macroeconomic data YTD has beaten expectations, but growth outlook for the full year remains weak
■ The rally in asset prices has been supported by the liquidity front-stop and should be sustained by this month’s LTRO
■ Tail risks from Greece suggest very near-term caution, but long liquid risk over the next month is still preferred


Less bad...
Developed-economy macroeconomic data has remained broadly better than expected. The same could be said for Asia, but the impact of an early Lunar New Year makes the data far harder to read.


Globally, PMIs have surprised to the upside, with both manufacturing and services PMIs rising in January in aggregate (Chart 1). Both the US new orders and German IFO survey have shown not only resilience but upside. This indicates further improvements in confidence, adding to stronger employment figures from both countries.


The composition of US growth has, however, been materially different to our expectations and signals significant risks ahead. Q4 data showed a weaker contribution from investment (we had expected the investment incentive act to bring forward spending), but an offsetting larger contribution from inventories.


Consumer activity increased, but this was driven by a reduction in savings rather than a rise in incomes. Recent US labour-market reports have painted a more optimistic picture, although the labour overhang is significant. High gasoline prices are also likely to act as a drag on household consumption, with prices at their highest ever level for this time of year (Chart 2).
We still see significant headwinds to US growth. Credit availability remains tight (the NFIB small business optimism index disappointed earlier this week), while the government‟s fiscal policy will also have a negative impact on growth.


To read the full report: MACRO STRATEGY
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