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Title BMI: Emerging Markets Monitor_Vol 14_No 18
File Detail
Date: 04/08/2008 Page: 2 File Type

Our view that the US may well be in

recession is closer to being vindicated, if

official data released last week are any

indication. Three conclusions can be

drawn. Firstly, as we had predicted, the

external sector is the only saving grace

in the US economy right now, as net

exports have kept GDP from contracting

outright over the past three quarters.

Secondly, the weak state of the economy

despite government stimulus cheques

and Fed rate cuts suggests that even

further monetary policy easing in the US

is possible, as suggested by our 1.5%

year-end Fed funds rate forecast. This,

of course, presents risks to our scenario

of a dollar comeback by year-end

(although this is mitigated somewhat by

the outperformance of the external

sector). Thirdly, the housing market has

not only been an albatross around the

neck of financial institutions, but also

seems to have dragged down the rest of

the economy with it. This is bad news

for financial stocks, but the increasingly

grim economic outlook is bad news for

the rest of the stock market, and commodities,

as well. We reiterate that this

environment is ultimately deflationary,

not inflationary.

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