Goldman Sachs is predicting a 75 basis points tightening of monetary policy in the US over the next ...
Goldman Sachs is predicting a 75 basis points tightening of monetary policy in the US over the next three quarters, assuming three 25 basis point moves in June, August and September.
Although the group does not see a compelling reason for Fed officials to tighten policy this year, it notes the Fed uses a different template as its guide in contemplating monetary policy changes.
Bill Dudley, an economist with Goldman Sachs, says: 'The idea that seems to have gained some currency at the Fed is the need to take back some of the 'insurance' easings taken out post September 11 now that they are no longer needed. There is also a view that the Fed needs to get started soon, if it is going to get back to a neutral federal funds rate of 4% to 4.5% sometime in 2002.'
Belying this predicted tightening of policy, Goldman Sachs is anticipating a slowdown in the growth pace of the US economy in the second half of the year. Dudley says domestic final sales are expected to grow at only about a 2% to 2.5% annual rate during 2002. He adds: 'Consumer spending will be restrained by a sharp fall in mortgage refinancing activity, the recent rise in energy prices and a slower trend for wage compensation.'
The recovery in capital spending in the US will be more subdued than generally anticipated. This, Dudley notes, reflects depressed capacity utilisation rates and the involuntary cutbacks in capital outlays imposed upon highly leveraged firms by the unavailability of attractive capital markets financing.
Dudley says: 'Imports are likely to grow faster than exports and this will sap the economy's momentum. The sharp widening in the trade deficit in January due to a sharp rise in imports and stagnant exports is the first installment of this process.
'The higher profile for real GDP growth, however, has few implications for the inflation outlook, which remains benign.'
Merrill Lynch is in limited agreement with the somewhat bearish US growth outlook held by Goldman Sachs. The Merrill Lynch American fund manager and head of the group's US large caps area, Richard Boon, says investor focus is switching to an economic rebound, leaving scope for upside surprises to consensus growth expectations as the pace of destocking slows. He says: 'However, we remain concerned over the ability of final demand to accelerate once the initial boost from stock building fades.'
Although, he adds, evidence continues to show that the consumer remains resilient and the labour market is improving.
US shares have suffered more recently due to the collapse of Enron, which has affected many companies perceived to use dubious accounting standards. These developments overshadowed positive economic news, pushing all major US stock market indices into negative territory over February, Boon adds.
Within the Merrill's fund, Boon says its relative performance over February was aided in part to his choice of shares in the consumer discretionary sector, in particular the position in media company Omnicom. The stock rose 5.88% in dollar terms for the year to the end of March 2002, compared to a rise of 0.28% in the S&P 500.
Labour market showing improvement.
Consumer remains resilient.
Inflation remains benign.
Sharp widening in the trade deficit.
US growth set to slow.
Fiscal policy set to tighten.
£300bn of liabilities
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