For some time share markets have been signalling to the world that the global financial crisis is over. Now Wall Street is indicating that the recession and the economic downturn is not going to be the protracted affair that was anticipated and that recovery – particularly in company profits – is going to be more rapid than analysts had been predicting.
American companies are brilliant at using economic crises to lower costs and so they bounce back quickly. Wall Street is reflecting that, with a gain of more than 3% overnight.
However, the implications of this rally go further and so we also saw oil and copper prices jump last night – the world expects that the recovery that Wall Street is signalling will flow through to consumer demand.
While growing consumer demand will be welcomed by markets, if the bounce-back is too quick it will fuel damaging inflation – US CPI came in above expectations last night, so central bankers will be watching this danger very closely.
What we are seeing is the affect on the US and global economy of an unprecedented level of international fiscal stimulation. It’s working just as its designers predicted and so global leaders must be very pleased.
Wall Street is not only predicting that this momentum will move to US consumers, but will eventually boost depressed property values. In the past that is what has always happened and to maintain market momentum it needs to happen again. But down the track we must remember that China is a significant source of funding for American spending.
For awhile the Chinese will enjoy the relief that higher US demand creates for their factories, but this stimulus has been created with the help of Chinese money and longer term they are going to require a different ball game. Australia has just seen a touch of the toughened stance of the Chinese via the Rio Tinto affair. That toughening will also affect the US.
The exact course of this recovery will depend on how the balance between China’s money and America’s consumers is set. I don’t think it will be the same as before, but meanwhile, there is some enjoyment ahead in the stock market.
This article first appeared on Business Spectator.
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