Investors should heed conflicting economic signals. If they had predicted last week where the next negative sign was coming from, many would have said Europe, which is unlikely to emerge from its debt woes without another mini-crisis or two. But it turned out to be the US, where the economy contracted 0.1 per cent in the December quarter, against market expectations of more than 1 per cent growth. Conflicting signals emerged by the end of the week, with revised figures showing the US economy added many more jobs than thought in the December quarter, sending the Dow Jones index above 14,000 for the first time since 2007.
At the same time, China sent mixed signals about its industrial outlook, with the official purchasing managers' index falling marginally in January, while the HSBC PMI - more reflective of small and medium-sized businesses - rose, as both new orders and output hit the highest levels for two years. Meanwhile, the benchmark Hang Seng Index climbed to a 21-month high as investors took their cue from Wall Street.
Analysts underestimated the one-off impact of cuts last year in US federal defence spending and business inventories. But even if growth returns to a stable if sluggish path of 2 per cent this quarter, the first reversal of growth in three years says something about the fragile state of the American economy, ahead of a showdown next month between the White House and Congress over spending cuts that could hurt the economy.
Global signals remain mixed. China's growth rate has stabilised on target around 8 per cent, although analysts warn of a gloomy export outlook. Corporate chiefs at the World Economic Forum in Davos showed guarded optimism that the worst is over in Europe. But conservative central bankers are fretting over Japan's move to an ultra-loose monetary stance amid fears that such policies could undermine a sustained recovery. The outlook for Hong Kong investors remains fluid, given our exposure to volatile external forces. Low interest rates will continue to prompt a flow of hot money looking for better returns from property and other assets. This all calls for caution.