The US economy continues on track for a softlanding as further hikes in interest rates look unlikel...
The US economy continues on track for a softlanding as further hikes in interest rates look unlikely. The signs that the economy is slowing down are still present.
It is believed that the slowing in consumer spending in Q2 will continue due to the flattening in equity prices, a rising household debt burden, the oil price tax and a satiated demand for consumer goods.
PPI core consumer goods prices fell for only the fourth time in the last 2.5 years. CPI remained relatively quiet for the goods sector, while inflation rose slightly in the service sector. Retail sales rose by 0.4% from the previous month, while there was no major increase in auto spending. The unemployment rate remains steady at 4%, which is compatible with containing inflation. Sustainable productivity growth has risen from 1.5% to 2.5%, which Fed chairman Alan Greenspan believes is consistent with earnings expectations implicit in current stock market valuations of an overvalued bull market.
He says there will be further increases in productivity growth, reflecting a deepening increase in the pace of capital and it is here to stay. But it is not expected that the economy will continue to grow quickly as a result of this productivity growth without necessarily pushing up inflation rates or affecting unemployment rates.
The market is not without risks. There is still a current account imbalance, and a tight labour market could lead to problems. One of the risks is that interest rates could become prematurely enthusiastic. It is un-likely, however, that the stock market will be targeted with monetary policy. Although it is overvalued there is a structural case for a bull market, investors are cautious about entering the market at these levels.
Van Kat Chidambaram, investment manager at Global Asset Management (GAM), says: "Oil firms have become popular in the US due to the rise in oil prices this year. Oil prices have picked up due to the shortage of inventories in the US oil stocks which have been pushing up the prices." GAM suggests integrated firms such as Chevron, Exxon Mobil and Texaco have become good buys because they deal in both exploration and refining and benefit from higher oil prices.
Ian Henderson, director of' Flemings, says: "The oil sector is reasonably good and has consolidated enormously."
Firms to watch out for, he says, are Devon Energy, Burlington and Phillips Petroleum. Devon has a good record in explorations and acquisitions, while Phillips has made a recent acquisition which has changed the mix of companies business and is moving into new areas.
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