Strong PMIs fuel some optimism…

Things are getting better, at least in the industry across the globe. Activity indices in all of the major economies moved up in the final month of 2011, signaling in some cases a slower pace of decelerating and in others actually a recovery. We pointed out yesterday that the ISM might be stronger than anticipated but actually the biggest surprise came in Switzerland where the index recovered from a deep slump above the 50 points mark despite an unfavorable mix of a strong currency and a weak demand from the euro zone. This increase would normally look suspicious if not improvements recorded elsewhere and the fact that the Swiss export sector might reap benefits of improved global conditions.

With PMIs up one faces the question if the worst is behind us and if yes, are we on track to what was expected a year ago. The answers might be yes and no. It is likely that the activity bottomed in the Autumn of 2011. Even though the euro zone faces a tough deleveraging process, the US economy is clearly accelerating and there are signs that authorities in Asia will try to cushion any slowdown even if at a cost of a future inflation.

…but caution is warranted

However, having that said, one should not expect a rapid recovery (and thus any significant rallies on equities or emerging market currencies). Euro zone is still going to be a drag and increased risk aversion (due to the debt crisis) is going to affect other economies. Additionally, the global economy must cope with high oil prices (even if the Iran risk is not going to materialize) which hit consumer sentiment and limit policy options in developing economies. Therefore we would assume a rough market without a strong trend on equities and with the euro possibly continuing to decline against the dollar in a mid-term (that is over the next couple of months).

Przemysław Kwiecień PhD, Chief Economist

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