The market is more volatile than economic data.
This may sound like a fairly obvious statement, but it tells you something very important: sometimes the market moves for reasons that are not justified by economic data.
Take the substantial risk sell-off two weeks ago. The trigger was supposedly the weak US retail sales number released that Wednesday, but this is clearly not the true cause.
Even during strong economic expansions, retail sales are negative one month in three, whereas they have been positive seven out of nine months so far this year.
Paradoxically, the trigger was probably earlier optimism. Enough investors were expecting an economic recovery, or at least asset-friendly actions from central banks.
They were looking for good growth data from the US, further action from the European Central Bank and the Bank of Japan, and a continuation of growth in emerging markets.
If a global slowdown has begun, some people did not get the memo. Workers in the US have continued to post surprisingly low initial claims for unemployment benefits, signalling an ever stronger labour market.
Purchasing managers for companies around the world did not get the memo either. The purchasing manager indices (PMIs) are widely recognised as the most reliable leading indicators of where economies are headed.
The global PMI is down a bit, driven mostly by the eurozone. But in spite of growth issues in Latin America, the index for emerging markets remains strong.
The US’s numbers have moderated, but from very strong to simply strong. Geopolitical risks may play a part, with the Ebola virus taking over from the Ukraine crisis, plus the actual and potential referenda in Scotland and Catalonia.
But there was no sudden change in geopolitics that could have justified the sudden risk repricing.
Instead, it simply looks like enough investors decided to capitulate on their trades. As the price of risky assets fell, other investors decided to capitulate in a snowball effect, probably to defend profits as year-end approaches.
So is global growth slowing? Some people have pointed to the fall in the oil price as a sign of weakening global demand. Of course, some people warned that the earlier high oil prices were holding back the global recovery. Can oil prices really mean slower growth regardless of which direction they move?
Strangely enough, they can. But also strangely enough, both rising and falling oil prices can be a positive sign for global growth. In short, we need to know more: we need to know what is causing the change in oil price. Is it supply or is it demand?
If the global economy is slowing, then falling oil prices would be an early warning sign because the decline would be caused by a drop in demand for oil. But what if oil prices are falling because of excess supply of oil?
That would be a positive supply shock for the global economy. As the price of energy falls, consumers would gain more disposable income to spend on other things.
Either the global economy will have to slow down as expected, or asset prices may find themselves out of sync with the economy they are meant to represent.
Joshua McCallum is head of fixed income economics at UBS Global Asset Management
