NEWS / Foreign Exchange

U.S: An unfriendly news flow

• The news flow on certain US data and the energy markets turned more unfriendly during February and March. Consequently, we are employing a softer growth profile in H1. There are three arguments be-hind our revision:
• Firstly, the tailwinds from gasoline prices will to turn into headwinds during the coming months. This is our primary concern. Gasoline prices are up by more than 50% since the bottom in mid-January and will hit US consumers over the next 3-4 months.
• Secondly, new home sales have been surprisingly ?– or rather suspiciously ?– weak in the first months of this year compared to indicators that usually provide a consistent tracking of the index. While this suggests that the drop in new home sales could be temporary, the current weakness will inevitably de-lay the stabilisation of the housing market.
• Thirdly, the weakness in durable goods orders has extended into February and promises another slug-gish quarter for corporate spending. This will weigh negatively on H1 GDP as well. However, we call for a comeback in business spending in the coming quarters, as we expect a recovery in the ISM index.
• While the recent data and a softer growth profile for H1 have increased the risk for a self-perpetuating negative dynamic in the economy, our main scenario of healthy growth in H2 remains in place. However, to reflect that growth risks have increased in recent months, we mark down our 12-month Fed forecast to 5.25 % from 5.50%. Inflation remaining high will keep the Fed on hold through-out 2007.