Rising economic or political uncertainty usually casts a pall on the prospects for risk assets, but often the damage is temporary providing economic growth prospects remain promising. Uncertainty about how the bail-out for Cyprus will progress and even some doubt about how the Australian government will perform running up to the September election in the wake of the leadership issues last week have dampened investor sentiment. However, neither the crisis in Cyprus or Australia’s political situation is likely to derail the signs of economic improvement appearing in the world’s biggest economy, the United States. As long as the US economy continues to improve, it is reasonable to expect strengthening global economic growth which in turn will trump the negative impact of flaring problems in smaller economies.
In the US, the economic news over the past week was on balance positive. Most of the US housing indicators released showed improvement. New housing starts rose in February by 0.8%, but permits for new homes were particularly strong, up by 4.6% in the month and providing the promise of stronger home building activity over coming months. Existing home sales rose by 0.8% in February and January sales were revised upwards to a 0.8% increase from 0.4% reported initially. The January FHFA house price index rose by 0.6% in January increasing the annual change in house prices to 6.5% from 5.6% in December.
As well as the good news on US housing, indicators of manufacturing activity were strong too. The early or “flash” March manufacturing PMI came in at 54.9, comfortably above the 50 boundary between an expanding or contracting sector. Also, a regional manufacturing reading, the March Philadelphia Fed index, covering the mid-Atlantic area worst hit by severe storm damage back in November surprised by jumping to +2.0 from -12.5 in February (this survey has an expansion/contraction boundary marker of zero).
There was also more good news concerning the US labour market last week with the latest weekly initial jobless claims reading up by a smaller than expected 2,000 to 336,000 and the four week average reading of 339,750 is the best reading of the recovery so far and consistent with monthly nonfarm payrolls lifting to around 350,000, a significant step up from average monthly readings around 200,000 since late 2012.
Despite the improving US economic outlook the Federal Reserve (Fed) is taking no chances and reaffirmed last week that both the expansion of its balance sheet (QE) and its near-zero cash rate will persist until either the unemployment rate is consistently below 6.5% or inflation is persistently above 2.5%. The Fed issued its latest economic forecasts indicating that it expects neither the unemployment rate or inflation benchmarks to be challenged through 2013 or 2014. In short, the Fed will have the monetary policy pedal flat to the floorboards for many months to come.
Laminar Group’s view remains that the US annual economic growth will accelerate through 2013, more particularly in the second half of the year. As long as the US economic growth outlook is robust, what happens in Cyprus, even if it has broader repercussions for the euro-area is unlikely to cause more than brief setbacks to improving risk asset markets.