Sunday, August 16, 2009



Strength of rebound to surprise…
Second quarter data continue to suggest that the pace of contraction in activity has slowed markedly since the precipitous pace of decline in the first quarter. This sets the stage for a return to positive growth rates in Q2. US economic evidence for example continues to surprise on the upside, with demand for housing and autos in particular rising above expectations. Consensus expectations for the US in H2 are shifting higher towards to 2-2.5% range. We see potential for even stronger growth as the inventory cycle alone could add 1.5% in GDP in H2. It’s a similar story in the euro area, where the success of car incentives is coming on top of the cyclical rebound in inventories. We continue to think that the strength of the recovery in manufacturing H2 will come as a surprise to the markets and will strength expectations that central banks will be heading for the exit early next year.

…but rate hike speculation premature
In contrast both the ECB and the Bank of England struck a more cautious tone last week largely on concerns about what happens after the inventory-led bounce in manufacturing. These are concerns that to a certain extend we share. So far the consumer has been supported by falling inflation leading to a resilient consumer outturn in H1. However these trends are about to turn around which will put pressure on consumer spending power in H2. Without a self sustaining recovery in consumption, activity risks falling back next year. As such, expectations of early interest rate rises by the Fed and the ECB look set to be dashed next year even if the market is increasingly moving in that direction in the short term.