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Sunday, 21 October 2012

US ECONOMY: Growth is Still Subdued

us economy subdued
(Image by By Abode of Chaos via Flickr)
EURUSD could correct short-term, but a rise to 1.34/1.38 is still on the cards. The European debt crisis is ending.

Things are moving again.
Last week, retail sales showed 5.2 percent on the three month annualised rate, the highest level since the last part of 2011. The housing market is constantly improving, with the National Association of Home Builders’ (NAHB) confidence index rising in October to the highest target since the end of the housing bubble. Housing starts and building permits are at their best level since 2008. The manufacturing area is still stabilizing, since outputs rose just 0.2 percent over the month of September, after having declined 1.0 percent in August. Production and employment remain weak, but better results could be seen in the last quarter of the year. The monetary policy will remain accommodative for some time and will support the recovery, if the purported fiscal cliff is resolved in the shortest and smoothest way possible.
Without a durable monetary policy, growth will not be strong enough to produce a significant change in the employment sector. During their next meeting of October 23-24, the Federal Reserve is expected to confirm that interest rates will remain low. According to the study of cycles, since 1948 the unemployment rate had two bullish cycles (1952-1961 and 1969-1982). Within these trends, the unemployment rate has corrected for 1-3 years, top to bottom, before resuming the uptrend. How can this information be applied in the current market? The unemployment rate was last topped in 2009. If history repeats itself, it is expected to bottom again within the next few months, and then climb for the final wave.
Is the European crisis over?
The euro should perform well until year’s end. The European Central Bank (ECB) buying unlimited numbers of bonds has reassured the financial markets. The accommodative policy will support growth. Short-term, however, the European currency could contract until the Spanish government makes a decision about asking for additional financial help from the ECB. Last week, Moody’s eased pressure on the expectation that Madrid will soon ask for assistance. EURUSD could contract until 1.28-1.26. The medium term trend is still positive. A move above 1.3470 will target 1.34/1.38.
The European Union (EU) is again struggling to find a common ground regarding the political and fiscal unions. On one side, Germany wants an authority that has veto power over national budgets, while Italy and France are suggesting a “two speed model.” These continued delays are weighing on growth, with the Gross Domestic Product (GDP) expected to increase less than 1.0 percent this year. About 1.3 million jobs have been lost between 2009 and 2012, and the tail of the financial crisis is still stinging. Nevertheless, the worst could be over. The intra-EMU (Economic and Monetary Union) balance of payments is becoming more homogeneous, and Spain and Italy have almost eliminated the deficit with the Eurozone. In 2012, Europe’s deficit accounts for only 3.3 percent of the GDP, compared to 8.0 percent in the US. Wage costs are falling, and investments in southern countries are growing.
Angelo Airaghi,
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