FYI | Jun 26 2009
By Chris Shaw
With less bad economic news over the past couple of months investors have returned to markets, pushing up prices of assets such as equities and commodities. According to Morgan Stanley co-head of global economics Richard Berner, while the recent stalling of the rallies means further good data is needed for the push higher to continue, in his view investors may get their wish.
Berner suggests there remain some near-term upside risks for the US economy, with chances of slightly better data in severely depressed sectors such as housing and motor vehicles in the very short-term. There could also be a further boost as financial conditions improve, both the labour market and inventory liquidation could slow their rates of decline and consumer spending could show some growth in coming months.
With respect to housing, Berner notes the sector is getting a boost from tax credits, lower house prices and the lagged effect of lower mortgage rates, while an easing in financial conditions to some extent should see some pick up in auto sales in his view.
But Berner cautions such short-term improvements won’t change the story from one of a slow recovery in the economy overall given ongoing consumer de-leveraging, still restrictive financial conditions, cyclical weakness in exports and capital spending and budget issues all the way down to state and local governments.
Also, Berner notes the housing market remains unbalanced given high levels of supply and while prices have already fallen in bubble markets, they are only now coming down in some other markets around the country. Additionally, credit terms generally remain fairly restrictive, so he expects the US Federal Reserve will look through the near-term improvements given the medium-term picture is less bullish.
Such an approach will, in Berner’s view, push any monetary policy tightening into 2010, especially given there appears little risk of inflation at present. The interim period will give the Fed an opportunity to communicate its plans with respect to an exit from the current quantitative easing policy.
In other words, while data may see the Fed revise up their estimates slightly, there will need be more positive evidence of a recovery before there is any change in Fed policy in Berner’s view, with this change when it comes likely to take months to be implemented.
