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By Chris Tedder, Research Analyst, Forex.com
US employment data points to beginning of recovery
In the US, this year's data flow is pointing towards a nation that is trudging along, albeit slowly. The employment report in particular offers encouragingly broad-based strength, the 200k increase in payrolls marks the sixth consecutive gain of 100K or more, which could be sufficient to push the unemployment rate down slowly.
Part of the December gain was attributed to a distorted jump in the courier component, which could be reversed in January, but when the general upward trend is combined with the persistent decline in jobless claims towards the end of 2011, it suggests to us that the labour market is recovering.
Furthermore, the unemployment rate has gradually come off the 2009 high of 9.9% and, given recent revisions to household survey seasonal factors, is now on a smoother trajectory. Also, the Q4 decline in the unemployment rate was driven by employment growth, rather than the drop in labour force participation that previous estimates suggested. This is important when it comes to assessing the long-term health of the labour market, given that an unemployment rate that is skewed by individuals leaving the work force can cause the rate to increase when these individuals return to the labour force in later quarters/years.
Europe could see further downsides
On the other side of the Atlantic, the situation has become fairly stagnant but there is still the possibility of more downside. Germany is the one bright light, and there is evidence of some improvement in business confidence in the country, which could put GDP back into positive territory for Q1, after a slight contraction in Q4.
In France, there are also some indications that the country is moving in the right direction, including recent PMI data, but there is more evidence that the country is in trouble. The labour market is worsening and it is becoming more likely that the French government will have to engage in more fiscal consolidation this year, likely involving more budget restrictions.
China benefits from range of economic options
When considering a breakup of investor sentiment we have to consider the source of so much of the world's demand, China. The PRC is in the middle of a sharp slowdown and its exports are clearly suffering from decreased levels of demand due to the European crisis.
However, the government has a large tool box which they can use to stimulate growth if needed, including adjusting the required reserve ratio to allow banks to lend more. The biggest concern in China is that the country comes in for a hard landing and its property bubble bursts, but we think that this is unlikely to happen.
Overall, we might see sentiment splitting, with Europe on one side and the rest of the world on the other. The main driver of this notion is the belief that the situation in Europe will not get bad enough to drag the global economy into a worldwide recession. Furthermore, the US should grow at a steady pace for 2012 and China will likely be able to control its declining levels of GDP growth. So, this could benefit risk assets throughout North American and parts of Asia, including Australia and New Zealand.
Staff
