Global CIO Commentary by Scott Minerd
"A few weeks back I pointed out that just about every bit of good news was being discounted into the market and that a continuation of such a trend was unlikely. Now that the good news has been digested, market participants are increasingly returning to their worries. Europe, China, and the Fiscal Cliff have returned to center stage.
While these global economic issues are not sufficient to derail further U.S. expansion, the market needs time to consolidate and we are now in the most seasonally difficult time of the year. Given that credit spreads have plunged and equities have surged higher, especially in Europe, I would expect some kind of pullback in stocks and credit spread widening in the coming weeks.
The good news is that pullbacks should be regarded as buying opportunities. I expect the rally to resume before the end of October, with the S&P500 reaching new highs before the end of the year.”
Economic Data Releases
U.S. Economic Data Mixed, Weakness in Construction and Manufacturing Countered by Resilience in Employment and Sentiment
U.S. real GDP growth in 2Q was revised down to 1.3% from 1.7%, led by a decline in farm inventories as a result of the drought. In August, durable goods orders fell sharply, down 13.2% from July, led by the 34.9% decline in transportation equipment orders. Construction spending also decreased by 0.6% in August, the second consecutive month of decline. Personal spending grew 0.5% MoM in August while the price deflator rose 0.4%. Personal income rose 0.1%, the slowest monthly gain in nine months. On the positive side, jobless claims fell to an 11-week low and the University of Michigan consumer confidence index rose to a four-month high. The ISM manufacturing index rebounded to 51.5 in September, ending three consecutive months of contraction.
Spain is on Track to Miss Budget Targets, Chinese Manufacturing Improves, and Australia Slashes Interest Rates Further in the Face of Slowing Growth
The eurozone unemployment rate rose to an all-time high of 11.4% in August, with consumer confidence sinking to its lowest level since May 2009. Manufacturing PMI in the eurozone rose to a six-month high of 46.1 in September but remains in contraction. Germany, France, Italy, and Spain all posted manufacturing PMI’s below 50. Spain is currently on pace to miss its official deficit target of 6.3% of GDP for 2012. Its budget deficit is currently at 4.8% of GDP through the first eight months of this year, which is equivalent to a 7.2% annualized rate. In China, industrial profits fell 3.1% YoY on a cumulative basis through August. Both the HSBC and the official manufacturing PMI improved in September, although both are still in contraction. Elsewhere, Japanese industrial production fell for a second consecutive month in August and the Australian central bank cut its benchmark interest rate to 3.25%, the lowest since 3Q2009.
Chart of the Week
Eurozone Real GDP Growth vs. Eurozone PMI Composite
The European Central Bank (ECB)’s bond purchase plan and its record low benchmark interest rates have stirred the rally in European equity markets over the past three months. The euro stoxx 600 index has climbed 16.2% since early June. However, economic fundamentals in the eurozone continue to weaken. Historically, the eurozone purchasing manager index composite (PMI composite), which encompasses both the manufacturing and service sectors, tends to trend closely with GDP growth. In September, the PMI composite fell to a 39-month low and has been in contraction for eight consecutive months, suggesting that eurozone real GDP is likely to decline further in 3Q2012.
Source: Bloomberg, Guggenheim Investments. Data as of 9/30/2012.
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