We must now conclude that the eight-quarter slowdown in China's economic growth is over and that a slight acceleration in growth is occurring. It is now unlikely that meaningful monetary easing moves will be needed or employed in China, though monetary policy remains friendly. This is a clear positive for U.S. equities, as we can now scratch off a Chinese hard landing as a concern because the accumulated data are convincing. Importantly, a modestly strengthening Chinese economy reduces the risk that global economic growth will hit a wall or stall speed.
Eurozone economy: The EU is still mired in a recession with no signs of improvement next year, but expectations are low (so no surprise to risk markets). On the positive side, the ECB will continue to provide liquidity as policymakers finally have begun to work together in an attempt to form a banking union that provides a deposit insurance program and some sort of central authority that will assess countries' abilities and intentions to meet deficit goals.
I am not under the illusion that the heavy lifting is over -- it has just started -- and that there won't be substantive and painful bumps along the road toward structural change. Among the major reasons for this changing view was that the economic cliff looked less scary, with high-frequency economic statistics in the U.S. and China having improved.
The eurozone is still mired in recession, but last week's European economic data suggest that, even in that region, stabilization might be occurring. The final EU composite of the October manufacturing and service indices came in at 45.7 compared to the estimate of 45.8 (and 46.1 in September). While this composite is the lowest in over three years, the index has been relatively stable in the last eight months and consistent with real GDP (quarter over quarter) of only -0.2%. The important point is that the decline in business activity in Europe, though demonstrating slightly below-zero growth, is no longer accelerating.It is not out of the question that the European economies are now undergoing a bottoming process. Indeed, small incremental economic growth could be possible in Europe by the last half of 2013.