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
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.
