David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with DavDeborah Bai
The Nasdaq has retaken support of its 50-day moving average, and the S&P 500 is now on the precipice of retesting its 200-day trendline – both indexes are riding a three-week winning stretch.
The small-cap stocks have begun to outperform (up 4 per cent last week), validating the relative strength seen in the transports.
The only caveat is that this has been a low-volume recovery – in other words, a rally that has lacked conviction – then again, maybe a healthy dose of skepticism is a good thing.
Here is my top-10 list of factors driving the turnaround:
1. Financial markets were priced for a recession that never came; a ton of bad news was being discounted at the lows and here we have the Citigroup economic-surprise index at its high for the year. Go figure.
2. The charges made against former Brazilian president Luiz Inacio Lula da Silva (he was allegedly involved in the Petrobras graft scandal), may be an early sign that a leading country in the emerging-market world is now willing to tackle corruption.
3. China is getting better marks for policy transparency and the yuan has managed to stabilize in recent weeks – and now Beijing is making efforts to redress its overcapacity problem. The focus is now clearly on restoring growth over economic restructuring – at least for this year.
4. Both the European Central Bank and the Bank of Japan seem set on additional policy easing and likely less distortionary tools than negative interest rates – there is growing market chatter that the ECB will step up its current €60-billion ($87.8-billion)-a-month asset-purchase program and possibly expand the base to include corporate credit. The really good news however, is the backlash we are seeing over negative interest rates and the distortions they are creating (as in pushing mortgage rates higher, perversely, which we have seen in some instances in Europe.)
5. The Fed is no longer priced for more than one rate hike this year, and the key for U.S. Federal Reserve chair Janet Yellen on Friday was not the headline payroll number as much as the surge in the labour force (now swelling by 1.52 million over the past three months, which is the most in 16 years) – a sign that people are detecting opportunities and also a source of competition that should keep a lid on wage pressures. Be that as it may, consumer inflation is trending up and the U.S. economy is improving modestly in the first quarter versus the fourth quarter of last year, so all this is now helping the yield curve to resteepen after a huge flattening during the recent "risk-off" period, as we saw Friday with the two-year U.S. Treasury note yield up four basis points to 0.89 per cent and the 10-year yield popping seven basis points to 1.90 per cent.
6. The DXY U.S. dollar index has visibly peaked – great news for the corporate profit outlook, commodity prices and much of the debt-strained emerging market space.
7. The slide in the U.S. rig count to seven-year lows (down eight to 392 as per Baker Hughes's data) alongside growing producer-country willingness to curb output have helped lift the oil price. What has overshadowed the bloated inventory reports has been the news that U.S. production has receded now for six weeks in a row.
8. The "Trump Factor" has not been a factor because the markets realize that Hillary Clinton will be exceedingly hard to beat in a national election – the problem for The Donald is that there just aren't enough uneducated, blue-collar, white males who reside in rural areas any more (now if this were the 1870s …). For all the bluster, The Donald does not have such an insurmountable lead in terms of delegates. March 15 is key because that is when the GOP primaries shift to winner-take-all (the stakes in Florida are high with 99 delegates up for grabs, and Ohio with 66).
9. The U.S. economy is rebounding even with the trade deficit an ongoing obstacle – we should see GDP growth recover to over a 2-per-cent annual rate in the first quarter; the latest jumps in production, core durable goods orders and retail sales may well be game changers.
10. The sharp narrowing in credit spreads, especially in high-yield corporate debt, has allowed for a thaw in overall financial conditions that had tightened dramatically through January and into February. Indeed, U.S. non-investment-grade bond funds attracted $5-billion (U.S.) of fresh net inflows last week (to March 2), the most since at least 1992, according to the Lipper database. The average yield on high-yield corporate debt has plunged from a high of 10.1 per cent in mid-February (when a Chinese debt default, a European bank run and U.S. recession were all the rage) to 8.73 per cent currently.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.