The US economy: a temporary dip?

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Globe shining on documents

Last week Monday the markets opened with speculations about the possibility of economic contraction in the United States during H1. These speculations were fed by the Q1 growth rates and falling confidence indicators. Two days passed, and these ideas were put to rest: data about housing starts were considerably better than projected.

Further good news was announced by the various central banks last week Ben Steinebach Ben Steinebach Head of Investment Strategy

In Ben Steinebach’s absence, this week’s blog was written by Mark Schneiders

This confirms our view that the dip in the US economy during Q1 was caused by temporary factors: bad weather along the East Coast, strikes in the ports on the West Coast and falling capex in the oil industry as a result of the lower oil prices. We expect the economy to make a significant recovery in Q2. At the same time, confidence indicators remain high (meaning that consumers and producers in the US are optimistic about the future) and the labour market continues to grow at a fair pace.

Good news from the central banks

Further good news was announced by the various central banks last week. Both the European Central Bank (ECB) and the US Federal Reserve (Fed) presented the minutes of their most recent meetings. The April minutes of the Federal Open Market Committee (FOMC, the system of central banks in the US) showed that the Fed does not foresee a possible hike in its policy interest rate before September. These minutes, in which the Fed emphasises the threats to the US economy from slower economic growth in China, problems in Greece and the strong dollar, indicate that first sufficient confirmation is needed that the economy can withstand these threats. Investors responded favourably to this news about interest rates.

In Europe, the ECB announced that it was very pleased with the rollout of its bond-buying programme. The low interest rates and the weaker euro (relative to the US dollar) are cautiously boosting the economic recovery. The ECB again stressed that the time has now come for structural economic reform from political circles.

Big differences on the markets

While the markets in the United States set new records last week, the European markets spent recent weeks moving laterally. Concerns about the recent interest rate increases on the bond markets, the weakening US dollar and of course the Greek debt crisis rendered Europeans averse to investing. The first two concerns were eliminated during the week, when Benoît Coeuré of the ECB’s Executive Board announced that the ECB will raise the pace of its EUR 60 billion per month bond-buying programme in May and June, in preparation for the reduced liquidity over the summer months. This gave off a clear signal to the market that the ECB is serious about pursuing its programme, and took the wind out of the euro’s sails. Interest rate markets in Europe stabilised and the stock markets were given a boost.

The end nigh for Greece

In Greece, the treasury will likely be depleted by the end of the month. Just enough money remains to pay the salaries of civil servants and the pensions. The Greek government is gradually realising that they will need to bow to the demands of the country’s creditors. A concrete plan to raise VAT is said to be in place, and the Greeks are prepared to make further concessions.

Final trickles of news from the corporate sector

The last few companies presented their earnings last week. BAM’s figures show that construction companies in the Netherlands are still struggling, though light is visible at the end of the tunnel. Ballast Nedam had already announced a week earlier that it was in talks about a possible acquisition by an Austrian partner, or else a merger. Mapmaker TomTom was in the news when it announced that it had renewed and expanded its global contract with Apple. Refresco Gerber, a newcomer to the stock exchange, presented a loss for Q1, owing to the costs of its IPO. Disregarding the added expense, the juice and soft drink bottling company would have recorded a profit of almost 3 million euros.

Focus to shift to economic growth rates and sentiment indicators

The earnings season is virtually over, and investors will now turn their gaze to the macroeconomic agenda. Much of the focus will be on the data from the United States. Will our forecast of accelerated growth in Q2 be confirmed? On Tuesday the orders for durables in the United States will be announced, as will data about consumer confidence and the housing market. The focus will turn to the purchasing managers index (PMI) on Wednesday, and to the economic growth rates (GBP) on Friday. The markets will see encouraging data as confirmation that the Fed will likely hike its policy interest rate in September. In Europe, investors will look forward to the publication of confidence data for both consumers and industry on Thursday. The UK is set to announce its own consumer confidence data the same day. The economic growth data will be released on Friday. In Asia the principal focus this week will be on the economic data from Japan, including numbers for the trade balance, employment, consumer confidence and household spending.


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