The Dow (NYSE:DIA) jumped more than 200 points early Thursday as the market cheered Germany and jobless claims. German lawmakers have approved a measure to expand the European Financial Stability Facility rescue fund. The measure will grant the fund the power to buy bonds in secondary markets, enable bank recapitalizations, and offer precautionary credit lines. Meanwhile, seasonally adjusted jobless claims fell below 400k for the first time since August 6th. However, the market appears to be overlooking macro economic downgrades from big banks (NYSE:KBE).
Earlier this week, Morgan Stanley (NYSE:MS) announced a downgrade to the blood of the economy, oil (NYSE:USO). The bank cut its Brent crude forecast to $100 per barrel from $130 per barrel for 2012. MS explained that additional supply paired with weak global demand growth is the reason for the price cut. The bank says consumption will advance by 600k barrels per day next year, down from a 950k advance this year. JP Morgan (NYSE:JPM) has also reduced its global oil demand outlook for this year and next because of its downward revision to global economic growth.
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Today, Citigroup (NYSE:C) also reduced its outlook for global GDP. Economist at the bank expect growth to decline to 3% this year, and continue to slow to 2.9% next year. This downgrade comes just three weeks after its last downgrade to the global economy. Goldman Sachs (NYSE:GS) also added to growth concerns as the bank announced there is a 40% chance of stagflation. An economist at GS, Jose Ursua said, ” During these episodes, GDP per capita growth hovers below 1% and is less volatile than usual. They are also characterized by low inflation, rising and sticky unemployment, stagnant home prices, and lower stock returns. Stagnations are more likely than you would like. Because these events are correlated with financial crises, the conditional probability of stagnation in the current environment is higher than normal. Trends in Europe and the US are so far still following growth paths typical of stagnations.”
These days, investors take revisions from banks with a grain of salt. Numerous revisions over the years have caused many to remain skeptical of new reports from banks. Just last year, Goldman Sachs released a report that said the US growth outlook brightened significantly, and expected the average growth rate to increase to 3.6% for 2012. The bank explained, “Recent data reveal a firmer trend in domestic final demand and suggest that it will be sustained via improvements in net hiring and credit availability.” However, now the bank sees a 40% chance of stagflation. Plus, hiring and credit continue to deteriorate in today’s economy. Going forward, investors may find other indicators such as Dr. Copper (NYSE:JJC) prices more useful to forecast future growth. On Thursday, copper prices sank to a 14-month low in official trading on the London Metal Exchange.
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