U.S. Review

Stability at Low Altitude

• This week’s data suggest that the economic dive that goes by the alias "double dip" remains a low probability outcome. This view is reinforced by policy presentations suggesting that any future weakness would be met with further monetary easing.
• The roots of the current negative sentiment are found in the disappointing economic and jobs outlook relative to historical patterns. Fiscal stimulus associated with the Kennedy and Reagan tax cuts appeared to be more powerful than today, but the credit context of those stimulus programs was quite different.

Instrument Readings: Pulling up from the Dive

For a generation of Americans brought up on action heroes who face impossible challenges and then win the day, the results of fiscal and monetary stimulus are disappointing. Yet, the level of pessimism and talk of a double-dip strike us as too much of a bad thing.

This week we saw leading economic indicators such as the Institute for Supply Management (ISM) manufacturing report, jobless claims, factory orders and pending home sales give us signals of an economy that is stabilizing, but certainly at a subpar level compared to expectations. Our action heroes in the private and public sectors have helped to cut off the decline, but the legacy of consumer leverage and housing finance will limit the gains for this year.

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U.S. Review

New Day Yesterday

• Subpar recovery in housing had been our expectation but this week’s existing and new home sales data reinforced that the old themes of consumer deleveraging and the long-term workout for the U.S. economy remain in place. Our outlook for the second half of this year is for sub 2 percent growth and housing continuing its slow workout.
• Disappointing durable goods orders are an issue, given our expectation that capital spending would be a major positive for growth this year.
• Real growth in the second quarter was revised down to 1.6 percent due to weaker trade and inventories.

Old Day Now

Economic readjustment continues to dominate any upside momentum the economy may have, and this is especially true for housing. Existing home sales dropped 27.2 percent in July, which was well below expectations. The monthly decline was the largest on record. Payback from the tax credit is largely responsible for the sizable decline. High inventories, at 11.9 months for single-family homes, continue to dominate home prices and buyer expectations. Combined with weak job growth and low consumer confidence, the case remains for a slow workout from the housing boom. Meanwhile, new home sales fell 12.4 percent in July, which was well below the consensus estimate. Prior months’ data were revised downward. The absolute level of sales dropped to a 276,000-unit pace, which is a record low. Unfortunately, median and average sales prices fell in July as well. (more…)

U.S. Review

Slow Growth, but Growth Nonetheless

• Economic data released this week came in slightly below expectations, but remain consistent with our forecast of slow economic growth with a low probability of a double-dip recession. Second-quarter real GDP figures, however, may be revised lower based on international trade and wholesale inventory data.
• Consumer prices in July showed inflation remains benign. Contained inflation is good news for two key reasons: It increases consumers’ purchasing power and gives the Fed flexibility to keep short-term interest rates low.

Slow Growth, with Low Probability of a Double Dip

Economic data released this week came in slightly below expectations, but remain consistent with our forecast of slow economic growth with a low probability of a double-dip recession. Second-quarter real GDP figures, however, may be revised lower based on international trade and wholesale inventory data. (more…)

Overview

A week spent speculating which banks might fail their ‘stress tests’, and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban’s refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February’s unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more.

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