Growth estimates challenged everywhere



US employment dipped in May sharply and JPMorgan, for one, immediately revised Q2 GDP forecast down to 2% growth.

Then, Japan’s machinery orders are down 3.3%. China’s bank lending fell more than expected as Hong Kong investors piled into short bets on a belief that “property is in a massive bubble in China and perhaps they’re betting on a collapse in that area”.

Uncertainty in Europe over how to resolve too much government debt continues to fester a belief that, eventually, banks will have to fess up some major losses there.

One good measure that all this negativity may be closer to the bottom is to hear Nouriel Roubini assign a probability factor of 1/3 that global economy will tank, with the other 2/3 equally split between anemic growth and optimistic outcome. Roubini sure can’t go wrong when good, bad and the ugly are split in equal ways.

Anyway, MarketWatch’s top forecaster, Lou Crandall, blames imprecise data on a skewed view of the economy. He blames painstaking task of compiling and sampling GDP monthly data which makes lots of noise and all of it ends up getting revised big time.

Crandall says that Chicago Fed National Activity Index seems to be the best gauge of the economy, and the index went negative only in April, meaning that GDP was expanding in the Q1. Meanwhile, companies are flushed with cash and they are still to use it on refurbishing their neglected physical and human capital as well as engage in organizational investment like advertising and training.

Corporate profits are seen as the next wave in capital expansion at JP Morgan as well.

In an econ research note from May 27, JP Morgan says that their conviction in a rebound “rests on the strength of corporate balance sheets” as well as Japan’s bounce and an end to the “energy drag.” Their short term focus remains at (1) Japan (2) Oil (3) China avoiding hard landing and (4) Expansionary business behavior in the US.

On Japan, it’s a wait and see as some political issues need resolution but on oil we already hear that Saudi’s will pump 10 million barrels in June, up from 8.8 million in May. Saudi’s may also want to win the political sniping war with Iran and make sure that Iran does not stir control of OPEC. Saudi oil minister has reportedly said “Just send the customers, don’t worry about the volumes.”

Will this induce others to sell earlier, at a cheaper price, before customers come to the Saudis?

It will also be interesting to see how hedge funds react in next several days as all this new oil comes to the market. Hedge funds are reportedly holding on to 3 days of global supply and may run out of money to keep getting long on oil.

China’s Statistics Bureau is scheduled to publish key economic data for May, including CPI figures, on Tuesday and there is an opinion that market may react on a downside irrespective of whether the report comes in positive or negative.

“Unfortunately, there may [be] no winning when it comes to the Chinese data – a negative surprise could lead to concerns about Chinese growth while a positive surprise could spark speculation of tighter monetary policy – both of which could lead to slower global growth,” writes Kathy Lien, Director of Currency Research, GFT.

Laszlo Birinyi, who has consistently been [correctly] bullish on the market, remains so and says that “When you have a market that begins like this market did, doubling in the first two years, those are not the kind of markets which are of limited duration and limited price.”

Unlike Roubini, Birinyi is worth an ear.

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