Global growth outlook seen intact as stock market rebounds

[NEW YORK] Wall Street's solid rebound on Monday following a two-week roller-coaster ride preserved investors' outlook that the global economy remains on a steady growth path, analysts said.

Goldman Sachs and other analysts pointed to a number of factors behind their upbeat global forecast including China's plan to generate high single-digit growth, Europe's re-emergence from its sovereign debt woes, and US tax cuts and increased spending.

Goldman Sachs analysts said the current market turbulence poses only a "modest" risk to their "optimistic" view on the global economy. Goldman estimated the global economy was expanding at 5.2 per cent in January.

"The history of market corrections during times of strong economic data suggests that this correction will more likely be short and shallow than long and protracted," they wrote in a research note published late Sunday.

However, analysts' optimism could wither if market turbulence persists and stock losses pile up. That would hurt consumer confidence, and slow investments and spending.

The two-week sell-off pushed the Dow and S&P 500 into the red from their record peaks, down 0.5 per cent and 0.7 per cent for the year, respectively as of Monday. Nasdaq clung to a 1.1 per cent gain after rising as much as 8.7 per cent from its all-time peak on Jan 26.

Many analysts blamed the stock market sell-off in recent weeks on rising bond yields with 10-year Treasury yields at a four-year high, and soured bets that market volatility would stay low.

For now, analysts said a near wipe-out of stock gains in early 2018 were overdue following a blockbuster 2017 when major US stock indexes produced their best annual performance since 2013.

As such, the US economy is on track to grow about 3.1 per cent in 2018, according to Credit Suisse, following the budget deal last week.

"The economy is growing at the fastest pace of the recovery, enhanced by tax reform and the additional fiscal stimulus of the recent budget deal. Corporate earnings are surging," Ameriprise chief market strategist David Joy said.

On Monday, Wall Street's main indexes rose for a second straight session, recovering from a vicious sell-off that slashed US$6 trillion in value from stock markets around the world.

In late US trading, the Dow ended up 1.7 per cent; the S&P 500 up 1.4 per cent and the Nasdaq up 1.6 per cent. The MSCI world stock index was 1.2 per cent higher.

INFLATION HOLDS KEY

As the stock market found some footing, it may not be out of the woods as investors await evidence as to whether US inflation is accelerating.

A government report earlier this month showed that year-over-year wages grew 2.9 per cent in January, the biggest annual increase since June 2009. The pickup in salary growth has stoked bets the Federal Reserve may raise key overnight borrowing costs faster to keep inflation in check.

The Labor Department will release the Consumer Price Index for January at 8.30am EST (1330 GMT) on Wednesday.

Analysts polled by Reuters expect the year-over-year increase in the government's broadest inflation gauge is likely to slow to 1.9 per cent from 2.1 per cent in December.

If CPI runs hotter than projection, it may fuel concerns that the Fed may raise interest rates even faster. In turn, this may send bond yields higher, triggering a fresh wave of selling in stocks that may last long enough to be a drag on the economy, analysts said.

Higher yields, a more aggressive Fed and a growing budget deficit loom as longer-term threats to the economy.

"We are optimistic about near-term growth, but it is becoming easier to envision the end of the current, near-decade long economic expansion," Credit Suisse economists wrote in a research note.

REUTERS