Theme du jour: Manufacturing renaissance vs. Middle-income trap
--You'd almost think we had turned the clocks back a decade or two to hear how positive investors are lately on the good old-fashioned manufacturing sector. Bob McKee of Independent Strategy earlier this week told Worldwide Exchange he thinks the fourth quarter marked the bottoming out and start of a renewed uptrend in global production.
--J.P. Morgan is similarly bullish;"after stagnating for much of last year, global manufacturing is expected to rise at a 3.5 percent pace…Asian economies that lie at the center of the global technology and manufacturing cycle will benefit most."
--Or will they? Mr. McKee is more cautious, citing the "Lewis turning point" at which developing economies run out of cheap labor and additional growth must be driven by increasing total-factor productivity (which is linked to social and political reform); a point at which many nations in the past have fallen into the middle-income trap.
--To be successful this year,investors need to find "the economies that will escape [this] trap rather than choosing those that are lifting off from poverty"; Mr. McKee's list of likely winners includes Poland, Chile, Mexico, the Philippines and possibly Turkey. Brazil, India and Russia fail to make the grade, and even China "looks increasingly likely to stay a middle-income economy," he cautions.
The snake strikes back
--Surprisingly strong set of trade figures out of China today; exports jump 14.1% in December from a year earlier whilst imports rise six percent (compared with expectations of four percent and three percent growth, respectively). Of course, to really power the global economy from here it would be nice to see those figures reversed. Indeed, China's much-maligned trade surplus re-widened to $31.6 billion. Still, the yuan jumped to fresh record highs against the dollar; rebalancing towards domestic strength seen as a gradual process as growth accelerates again.
--If there's any rebalancing,perhaps it's towards capital markets and away from bank-reliant lending. New yuan loans in December came in well shy at about 454 billion yuan vs. 550 billion expected, per Reuters; bond issuance jumped however, up 65 percent for the full year 2012 to 2.25 trillion yuan (full-year bank loans totaled 8.2 trillion yuan, just above the 8 trillion target).
--China, currently in its Year of the Snake, will report fourth-quarter GDP numbers January 18; the current forecast is for 7.8 percent, and 7.7 percent for the year which, while enviable by Western standards, would nevertheless be the slowest annual growth rate since 1999.Still…
"Global growth momentum building"
--That's J.P. Morgan's call, anyway, in its 2013 outlook, which sees the year as a "turning point" after two years of sub-par performance. Global GDP rose 2.1 percent last year, a full percentage-point below trend, the firm notes; it sees a pickup to 2.5 percent in the first half and 3.3 percent in the second half of this year, noting "the bar for improvement is not very high."
--Indeed, a legacy of this underperformance is that developed-world inflation remains low; "With excess lack persisting, developed-market inflation is set to fall well below central bank objectives this year," the firm notes, leaving plenty room for additional central bank experiments with stimulus measures as fiscal stimulus continues to look unlikely.
--The country's unemployment rate is 26.6 percent and yet bond investors are flocking. Spain raised 5.8 billion euros of securities due in 2015, 2018 and 2026 in its first debt auction of 2013 – above the targeted 4-5 billion euro range. The benchmark 10-year yield promptly dropped below 5 percent for the first time since March 2012.
--Given that, the European Central Bank for now can sit back and hope its "whatever it takes" rhetoric and existing (but not yet activated) Outright Monetary Transaction program continue to work their market magic. Little wonder the euro is rallying; up more than a percent in early U.S. trading above $1.32.
—By CNBC's Kelly Evans; Follow her on Twitter: