July 23, 2012
The recent newsflow from the US economy was – a few positive surprises from the residential sector notwithstanding – disappointing. We now expect advanced Q2 GDP released next Friday to show a meagre 1% (qoq, ann.) print after 1.9% in Q1. Granted, there are some positives such as the relief from lower oil prices and the improvement in households’ balance sheets. Still, with the third negative reading of the Philly Fed index in July chances for next week’s ISM to emerge clearly out of contraction territory are limited (June: 49.7). Our current 2.7% call for Q3 GDP might therefore again fall victim to “salami slicing”. Meanwhile, Fed chairman Ben Bernanke remained tight-lipped regarding QE3, so yearned for by the markets, during this week’s hearings. He repeated that the Fed “is prepared to take further action as appropriate”, which was not really a market mover. Of course, Mr. Bernanke might not have wanted to preempt the next FOMC meeting or else wanted to keep his powder dry for the annual Jackson Hole rendezvous. Still, after the twisted QEs and with 10Y yields at 1 ½%, more Treasury purchases are rather unlikely to do much to squash the curve further and push investors into more risky assets. Some cryptic hints regarding possible, more extensive use of the Fed’s discount window might suggest that the Fed is instead contemplating something along the lines of the UK’s funding for lending programme. However, US commercial lending is running at a decent 5% clip and private households need to complete their cold turkey.
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