From its closing low on 3 October, the Dow Jones Industrial Average is up 9.3%. The French stock market index, CAC-40, is up 12.9% from its closing on 4 October. And the Sensex has bounced 8.2% in the last six trading sessions. The panic in the markets has abated. That’s best seen from the yield on the 10-year US treasury note, the ultimate safe haven, which was at a low of 1.78% on 4 October and has now increased to 2.23%, as funds flowed out.
But is there reason for the optimism? Well, the data suggests that while the apocalypse might strike eventually, it is likely to be delayed. Consider, for instance, the JPMorgan Global Manufacturing and Services PMI for September. This survey-based index rose to 52 from 51.5 in August, indicating the world economy was still expanding, chiefly on the strength of the services sector. Markit Economics explained the big picture: “The acceleration in September was mainly driven by the US, where growth of all-industry output hit a six-month high. China also reported a slight pick-up in its pace of expansion, as did the UK. Growth slowed sharply in France and India, and eased in Germany, Russia and Ireland.”
Some other indicators, too, were positive. Data on industrial production in Europe showed a rebound in August. The US payroll numbers and retail sales for September came in better than expectations. Apart from the data, Europe’s leaders made the right noises. There’s a lot that needs to be done to translate words into action; but, at least, a beginning has been made. In emerging markets, there has been an easing of policy rates in Indonesia and Brazil, and a pause in tightening in some other economies. In India, a 25 basis points (bps) hike by the Reserve Bank of India (RBI) in its policy statement on 25 October is baked into prices. One basis point is 0.01%. The price data show a slight deceleration in non-food manufacturing inflation, which is RBI’s measure of core inflation. While PMI data show firms are able to pass on cost increases, Tushar Poddar and Prakriti Shukla of Goldman Sachs point out: “On a m-o-m (month-on month) basis, core prices rose only 0.3% in September, which is at a 4.2% annualized rate. The q-o-q (quarter-on-quarter) data also shows core inflation falling to 4.8% annualized in September from over 11% in April. We think that the significant slowdown in growth is already putting downward pressure on core.” But rupee depreciation and the increase in administered prices could lead to inflation remaining stubbornly high. And RBI’s belief that commodity prices may remain elevated due to liquidity-fuelled speculation seems to be correct. Global liquidity remains strong and will be boosted by quantitative easing in the UK. While all these have led to a boost in asset prices, there’s plenty of scope for disappointment. There are signs the global market slowdown has started to hit employment, which will hurt future growth. Bond yields in Spain and Italy continue to rise. Exports from China and India have started to slow. But, perhaps, the most telling sign the markets remain very nervous is that the yield on the safe haven 10-year US treasury note, at 2.23%, is a tad above the low of 2.13% reached on 15 December 2008, after the Lehman collapse.