North America

  • The job market in the United States continues to be challenging for those looking for work. Corporations aren’t ready to raise their hiring intentions, yet. In the recent data release, the dip in the unemployment rate was biased by seasonal factors, as mentioned by the Bureau of Labour Statistics. Meanwhile, the trend in jobless claims isn’t heartening, for those looking for a pickup in economic activity.
  • Up to now, the strike by dockworkers on the West Coast has not had a significant disruptive effect on the economy. Many manufacturers, retailers and wholesalers had built up inventory levels ahead of the strike to alleviate the problem of shortages. However, if the dispute drags on it is likely to reduce the pace of growth. It is expected that the President will intervene before too much damage occurs.
  • Retail sales are closely watched by investors, given the significance that healthy consumer spending has for the economy. Lacklustre chain store sales and a decline in vehicle sales will mean that the September retail sales data, to be released this week, is not going to look good. However, this may have already been factored into investor calculations. But, looking forward, except for the boost from mortgage refinancing, there aren’t any other strong supports for higher consumer expenditure.

Europe

  • Normally, there is a close feedback relationship between profits and capital spending. The weak corporate earnings outlook is likely to place a cap on business investment expenditures, which will in turn affect profit growth. In addition, volatile capital markets also tend to discourage corporate expansion plans.
  • The poor performance of European equity markets is causing second thoughts among domestic retail investors who had only recently become enamoured with the equity culture. They are rediscovering the attraction of bonds.
  • Higher oil prices are likely to keep headline inflation rates from falling, in the near term. But the core rate has probably peaked. More importantly, consumer expectation of future inflation has declined sharply, presaging weakness ahead. This may give added impetus to the European Central Bank to ease interest rates before the year is out.
  • In the UK, consumer spending continues to be the main engine of growth and the Bank of England, by maintaining an easy monetary policy, has been doing its part to help until global activity and business spending can take over. Unlike the rest of Europe, government fiscal policy has been proactive in sustaining aggregate demand. The overall policy mix is closer to that in the United States than the Euro-zone.

Asia/Pacific

  • With the appointment of a reformer, Heizo Takenaka, to head the Financial Services Agency, Prime Minister Koizumi has demonstrated some resolve in tackling the banks’ bad loan problems. The sums that have to be written off are very large indeed and aggressive action will, in the short run, lead to further downside for the economy. Takenaka’s statement that "there were no banks too big to fail", and that he wouldn’t deny the principle that bad companies may disappear, scared investors - - as the Nikkei 225 plunged to record lows.
  • It is unwise to be too optimistic about the speed of reform. Whatever the will to restructure on the economic front, it is doubtful that it is politically palatable for the government to cause large-scale redundancies in important but inefficient sectors of the economy such as construction and distribution.
  • As for the large banks, it is well to remember that the regulators in the Ministry of Finance and elsewhere bear responsibility for the banks’ current problems. In the past, they cajoled banks, and other financial institutions, to make uneconomic loans and support equity prices - - leading to a sharp deterioration in their finances. These banks will not be allowed to fail, now.

Bonds

  • With U.S. Treasury yields continuing to test historic lows, there is renewed talk of a bubble in the bond market. But bond investors are generally vigilant, calculating, types who are less susceptible to fashion changes and crowd behaviour. By and large, they tend to be more forward looking than equity investors and quick to react to changing conditions.
  • High prices for Treasuries reflect risk aversion, as well as the implicit expectation of slow growth and low inflation. However, there is still the possibility of a short-term rally in the stock market that may provide an unpleasant surprise for over-complacent bond investors with extended duration.

Currencies

  • There appears to be renewed pressure on the Bank of Japan to set inflation targets, which would force it to increase liquidity until the inflation rate reached the desired level. In the past, the Bank has resisted implementing such a policy and is likely to drag its feet now. If it succumbs the yen will be subject to further depreciation.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.