As the chart shows this is more of a lagging than leading indicator so the apparent disconnect between economic expectations and market expectations suggests that the data will start improving again soon – rather than the other way around.
Indeed, data has only ever been half of the story for this rally. The other part has been the transitioning away from frenetic, on-the-hoof, policy making. The year started with two key risks dominating our thinking:
- The US cliff-to-ceiling negotiations
- The Italian elections
That is likely because on 1st March automatic sequestration spending cuts will kick in and by the end of March a bill will be required to continue to fund the government – generally this would result in a formal appropriations bill or a continuing resolution (September’s continuing resolution expires on March 27th).
The Republicans wish to lever these two events to force a long term spending plan which will restore the union’s finances. To give a sense of scale here we are talking about eliminating the budget deficit over a decade which might not sound very ambitious…but it is. Read today's Market Perspective in full >>
Head of Portfolio Strategy