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Economic Highlights

Stocks will likely have a calmer session today after Monday’s indiscriminate sell-off that was followed by other global markets, particularly Japan’s Nikkei Index which is now down more than 14% year to date. Pre-open sentiment is pointing towards positive open for the U.S. indexes. But irrespective of how today’s session unfolds, the growth question has take center stage for stock market investors in a way that few of us could have foreseen.

The growth fears about the U.S. economy, stoked by Monday’s surprisingly weak manufacturing sector survey, are new and hard to make sense of given the plethora of earlier data pointing in the otherdirection. Weather has certainly been very erratic lately and could be showing up in the data, but it’s too early to tell. Friday’s jobs report in particular and the service-sector ISM report later this week will give us more data points to get a handle on the evolving U.S. economic picture.

Unlike the U.S., the Chinese data is clearly pointing to renewed slowdown. There is some volatility in Chinese data around the Lunar New Year, which doesn’t fall on one specific date every year. So some of the weakness in recent Chinese numbers could be associated with that. But there is slowdown in that economy beyond what would typically be associated with New Year related volatility and questions about that country’s financial sector definitely represent a big downside risk. Chinese slowdown in turn has knock-on effects on countries dependent on commodity exports to that country. So you have legitimate question marks about the growth momentum on the margin for countries like Brazil, Indonesia, South Africa, and Australia.  

Beyond the effects of China’s growth on the rest of the emerging marketsis the ongoing turmoil in that group of countries, supposedly as a result of the Fed’s Taper decision. We don’t know at this stage how much impact the capital flight and associated weakness in exchange rates will have on these countries’ economic growth. But we do know it will be negative as one of the ways in which they can stabilize their exchange rates is by tightening monetary policies. Emerging markets account for a bigger chunk of the global economy at present and weakness there will have a bearing on the U.S. as well as Europe and China.

The U.S. economy is no doubt a lot less dependent on trade than Germany, China or even Japan, but it’s not entirely immune either. What this means is that while weakness in the emerging markets may not be enough push the U.S. economy into a recession, but it will have a bearing on the growth outlook, at least on the margin. Stock market investors are trying to size up this direct impact at present.

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