Global Markets Weekly - 3rd March 2008

• US growth figures were strong for the second and third quarters of 2007...
  Until recently, it seemed as if the much-discussed slowdown in US growth could be seen everywhere but in the growth numbers. On an annualised basis, growth in the two middle quarters of 2007 averaged 4.3% - hardly the stuff of economic recession.
• …as tighter lending conditions take time to affect the real economy.
  The main conduit through which the financial market disruption of recent months will hit growth is a tightening of lending conditions in the real economy. This affects growth in the same way as a tightening of monetary conditions, such as higher interest rates. And, as every economics undergraduate is taught, changes in monetary conditions affect the real economy with ‘long and variable lags’.
• Growth slowed abruptly in the fourth quarter...
  In the fourth quarter, the two most interest-rate-sensitive parts of the US economy – household spending and residential investment – did indeed slow. In addition, there was a reduced contribution from net export growth, perhaps inevitably so after US exports’ very strong performance in the second half of 2007. Because of these factors, overall growth for the fourth quarter slowed to just 0.6% annualised.
• …and could well slow further...
  Aggregated domestic demand growth was the lowest since the third quarter of 2001, at -0.3%. Credit conditions keep tightening for households and companies and, because of the long lags with which tightening affects household spending and corporate investment, the fourth quarter of 2007 is unlikely to mark the trough for these sectors of the economy.
• …if we are to judge by the jobs numbers.
  As well as tightening credit conditions, US households are also facing a slackening labour market. The best guide to the scale of this slackening will be next Friday’s release of February’s non-farm payroll numbers. Ahead of this, weekly initial jobless claims numbers have picked up markedly over recent weeks. The magnitude of this increase may be being exaggerated by the unusually early Thanksgiving holiday, which gave the numbers for the end of 2007 a downward bias. However, the overall level is now close to being consistent with the start of a recession, regardless of the speed at which the level was approached. As a result, we still expect a further slowing in growth during the first half of 2008. If anything, the risks of an outright recession have increased over recent weeks.
• Surging exports have averted an even steeper decline in growth...
  As the fourth-quarter GDP numbers indicated, export growth is – or at least was – acting as a firewall between the US economy and overall recession. Any signs that this export growth was slackening would therefore be a concern. As well as the slight slowing in the contribution from net exports in the fourth quarter of 2007 relative to the third, regional manufacturing confidence surveys – which are good lead indicators of the nationwide ISM manufacturing confidence survey – turned sharply down in February.
• …so we will be watching the ISM for any signs that exports are weakening.
  The ISM survey has fallen rapidly over recent months but is still above the crucial 50 level which separates a manufacturing contraction from expansion – and well above the low 40s associated with past recessions. That's because, as a survey of manufacturers, it is especially sensitive to export demand. The next ISM release is on March 3rd. Although we don't place too much emphasis on any one piece of monthly data, a further move down in the ISM would be particularly worrisome and further raise the risk of recession. For the time being, the US economic numbers remain on a downward plane. As we have noted before, this is likely to continue to unsettle investors in risk assets around the world.

Indices, Interest rates and Inflation

	Close 29-Feb-08	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	3,013	0.0	0.4	-8.2	-8.3
FTSE 100	5,884	-0.1	0.1	-8.5	-8.9
S&P 500	1,331	-1.7	-3.5	-10.2	-9.4
Nasdaq Composite	2,271	-1.4	-5.0	-14.6	-14.4
DJ Stoxx (Europe)	357	-0.3	-1.1	-14.5	-14.0
Nikkei 225	13,603	0.8	0.1	-13.3	-11.1
Hang Seng	24,332	4.4	3.7	-15.1	-12.5

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Mar-08 Forecast	Jun-08  Forecast	Current	Next Date
US (Fed Funds)	3.00	2.50	1.75	4.3	18-Mar
UK (Base rate)	5.25	5.25	5.00	2.2	06-Mar
Euro-zone (Repo Rate)	4.00	4.00	3.75	3.2	06-Mar
Japan (Call rate)	0.50	0.50	0.50	0.7	07-Mar

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