Global markets soar on economic green shoots

Markets from the US to Japan leapt yesterday after a report was released in the US showing the country’s consumer spending contributed 1.5 per cent to GDP in the first three months of the year after being in negative territory for the last two quarters. The rise was the fastest for two years and the Dow Jones Industrial Average jumped 2.1 per cent after the announcement, pulling the FTSE 100 Index up over two per cent higher.

Buyers were also cheered by comments from Federal Reserve’s Open Market Committee, which kept rates in the US at near zero and indicated for the first time that the economic outlook was showing signs of recovery, although with some reservations. It said "Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time."

When the focus turned to Asia investors wee further buoyed by  Japanese government report which showed that industrial output rose for the first time in six months at double the pace predicted by commentators. The figures added to hopes that the global recession is easing and sent stocks in the region soaring, with the Nikkei 225 Stock Average surging 3.9 per cent.

The optimism was somewhat tempered by other parts of the US GDP release which contained the spending numbers. The headline figure came in at an annualised rate of minus 6.1 per cent in the first quarter, almost as bad as the last quarter of 2008 and worse than expectations of a 4.6 per cent contraction.

Business investment contracted at an annualised rate of 37.9 per cent - a record number as companies retrenched and axed jobs. The overall result saw the economy shrink for three quarters in a row whch it had not done since the seventies recession, lending ammunition to the bears and economists who remain negative on the economy.

WHAT THEY ARE SAYING
Anthony Bolton, president of investments at Fidelity International, on Bloomberg TV: "All the things are in place for the bear market to have ended. We’re going to see a slow economic upturn, but that’s enough for the stock market. If you wait for things to get better, you’ll miss the rally."

Martin Hutchinson on Breakingviews.com: "The advance report of first quarter US GDP was stronger than it looked. It declined overall at a 6.1 per cent annual rate, faster than expected. But consumption turned positive and inventories dropped sharply, while weak government spending – which won’t be a problem once stimulus dollars start circulating – depressed growth. Capital investment inevitably plummeted. But the figures suggest the economy may be nearing a bottom. Unfortunately, it may also stay there."

Peter Schiff, of Euro Pacific Capital, quoted in the Guardian: "With the collapse of the housing and stock markets, the surge in unemployment, and the fall in wages, the only way that consumers can spend more is if they reduce savings or increase borrowing. However, our economy collapsed precisely because we borrowed and spent too much to begin with. The economy will not find a solid foundation unless consumers decide to live within their means. Sadly that message is not getting out." ·