The economic figures that have emerged over the past couple of months seem to have coaxed the market...
The economic figures that have emerged over the past couple of months seem to have coaxed the market into adopting the view that the next Fed move on interest rates, be it in July or in August, will be the last one in the current cycle.
Certainly recent data releases show labour market pressures stabilising, if not easing. Retail sales growth is slowing, and the housing market is cooling off, in terms of transactions and construction.
Consumer confidence has fallen from its highs, and there is also evidence of a degree of inventory build-up. This has occurred without a worrying pickup in inflation, and so the medicine as prescribed by the Fed seems to be working, and the need for further rises is limited.
It can be argued though that the second quarter has been weak in each of the past two years, and that growth has shown a substantial subsequent pickup thereafter.
Also, economic data has shown considerable volatility, so that a long term trend cannot be reliably extrapolated from a couple of months' data.
Further supporting evidence comes from the number of recent pre-announcements of profit and/or revenue shortfalls from companies in a broad spectrum of the economy. Most notable and frequent have been those from the retailing sector, but in addition they have come from companies in computer software, banking and consumer lending, basic materials and others.
These warnings stem from lower sales growth or increasing cost pressures, or both, and suggest that what we are seeing from the data so far is indicative of something that is more than just a blip in the numbers. What should not be doubted though is that the Fed will do what is necessary to slow the economy, if such a deceleration is not already occurring.
Slower growth is around the corner then, but the real question vexing investors now is whether we are in for a so-called "soft landing" or something firmer.
Should we experience a gentle slowdown, then the markets could edge higher over the remainder of the year. The technology sector would recover its leadership position in the market since its earnings growth rate should hold up better under this economic scenario. Given the unprecedented pace of the growth in consumer spending though, and the increasing number of factors at play in driving it engineering a soft landing would rank as Greenspan and his Board's finest achievement, particularly given the limited and unsophisticated tools they have at their disposal.
Such a rosy scenario would probably prove to be as much down to luck as judgement, and there is a real risk that growth decelerates to below the sustainable rate of between 2 % to 4% which the Fed and most economic watchers would seem to be comfortable with. If this occurred, there would be few hiding places.
James McLellan is a director of US equities at Clerical Medical
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