Perspectives from Above the Noise – Week of February 11, 2013

3 Stories in the global economy that should not go un-noticed 

Markets lost some exuberance last week as news out of Europe weighed on U.S. investors. Despite some selling pressure however, the rally rolled on as the S&P 500 edged to a five-year high. Major indices ended the week mixed, with the S&P 500 gaining 0.31%, the Dow losing 0.12%, and the Nasdaq gaining 0.46%.

Troubles in Europe drove most of the market action last week as downbeat European equities prompted selloffs in the U.S. Scandals have rocked European markets as regulators investigate several banks for trading irregularities as well as one of Greece’s leading statisticians, who has been charged with falsifying fiscal data

Here are the 3 stories this week that rose above the noise:

OPEC Raises Demand Forecast, Suggesting Improving Global Economic Activity

Despite rising supply from U.S. shale oil development, OPEC said yesterday that it will need to pump an additional 100,000 barrels per day this year. OPEC’s forecast suggests that global economic activity is potentially re-accelerating. Since U.S. oil production is projected by the Energy Information Agency (EIA) to increase 900,000 barrels per day in 2013 compared to an increase in global demand of only 650,000 barrels per day over the past two years, an oversupply situation and lower crude oil prices appeared possible in 2013.

However, crude oil prices have actually risen 6 percent year-to-date to $97.03 per barrel. One possible explanation for the crude oil price strength is that global demand is being underestimated due to improving economic activity — coming out of the 2007-2009 recession, global demand rose 2.3 million barrels per day in 2010.    

China Trade Growth Hints at Strong 2013

A recent Financial Times article summarizes Chinese trade data released last week, which seems to indicate solid growth in China and globally in January. Chinese exports rose 25 percent year-over-year in January, the fastest pace since April 2011. Imports increased 28.8 percent, which was a sharp acceleration from December’s 6 percent rise.

Analysts caution that there are significant distortions in the data caused by the timing of the Chinese New Year holiday, which fell in January last year but is happening in February this year. As a result, it will be important to average the first two months of the year once February’s results are released to get an apples-to-apples comparison of the trade data. Despite the concerns over the impact of the holiday, the trade data from China provides encouraging evidence that growth in China and abroad has accelerated in recent months.

Yellen Signals Fed Would Sustain Easing After Ending QE

Federal Reserve Vice Chairwoman Janet Yellen defended the Federal Reserve’s quantitative easing program and low interest-rate policy in a speech to the AFL-CIO yesterday. She reasoned that easy-money policy was necessary to help provide a spark to stubbornly slow economic growth in order to help drive unemployment lower, with inflation currently remaining below the Fed target of 2 percent.

In regards to the potential for budget sequestration, Yellen cited Europe’s struggles with fiscal austerity as an example to avoid deep budget cuts when economic growth is weak and unemployment is elevated, a view shared by Chairman Bernanke. Additionally, Yellen hinted that the Fed may maintain low interest rates (near zero) following the conclusion of the Fed’s bond-buying program, which will end after the Fed reaches its stated short-term target of 6.5 percent for unemployment or 2.5 percent for inflation.