US ECONOMICS: DOWNSIDE GROWTH RISKS BECOME REALITY - RICHARD BERNER
What's New: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago.
Conclusions: Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%.
Market Implications: Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.
Risks: As much of the impact of tighter financial conditions has yet to be seen, near-term downside risks to growth - and especially to earnings - predominate. But a first look at 2009 suggests a more cyclical profile, with growth rebounding from well below trend to slightly above it. Over the near term, however, fixed income investors may be disappointed in the Fed's easing pace, while equity investors may be too sanguine about earnings.
COMMODITY MARKET REPORT: HUSSEIN ALLIDINA
Energy prices continued to rally last week with WTI and Brent front-month prices up by 3.6% and 3.3%, respectively. Prices found support from another constructive Department of Energy Weekly Petroleum Status Report, which showed larger-than-expected draws in both crude and gasoline inventories. The likelihood that OPEC will leave production unchanged at its next meeting on September 11 is also lending support. Natural gas prices rebounded by 0.6% last week as rising temperatures increased demand and Chesapeake Energy Corporation announced that it would cut production owing to currently depressed prices.
Base Metals prices sold off across the board, with losses ranging from 9.7% in nickel to 2.9% in copper. Copper and lead prices weakened despite tighter inventories, suggesting the declines may have been driven by sentiment stemming from weaker-than-expected US economic data support, which increased fears of a US slowdown.
Precious Metals prices continued to rebound, with gold and silver prices increasing by 4.1% and 3.6%, respectively. Rising ETF demand and general return-tosafe-haven buying help lift gold to $701/oz — the highest level since May 2006. The potential for increased Swiss central bank selling through the remainder of the current
CBGA year (ending September 26) may mitigate nearterm upside in gold prices; however, the front-loading of Swiss selling is, in our view, bullish long-term.
Agriculture prices increased across the board with a 9.5% increase in wheat prices lending support to both corn and soybeans. Despite record high wheat prices, export demand remained robust with reports of dry weather lowering expectations for southern hemisphere harvests.
Technical Outlook: Gold’s surge to new yearly highs should result in further gains on an intermediate-term basis, with daily closes above $723/oz leading to $750/oz and potentially $800/oz. However, near-term consolidation is possible to alleviate overbought conditions between $718-$723/oz.
