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Introductionn
Hi, I'm Dan Peirce from the Global Asset Allocation team here at SSgA, and
joining us once again is Chief Economist Chris Probyn. Chris, the economic
data certainly started 2008 in downbeat fashion, but a few recent prints
have been even more troublesome, to the point where you now deem a US recession
as likely.
Factors Indicating Soft First Half
Could you highlight for us some of the factors that are indicating such a soft
first half?
- We have had two consecutive disappointing employment reports
- A rebound in initial jobless claims
- And, the tipping point, a plunge in non-manufacturing PMI, lowest since
October 2001
- We now put the probability of recession at 65%
Outlook for Fed Fundss
During January, the US Federal Reserve also came to the view that economic
risks had increased substantially, delivering 125 basis points of rate cuts
in two moves eight days apart. With recent data confirming their concerns,
what do you see as the outlook for the fed funds target in the months ahead?
- More cuts to come,
- During recession Fed typically reduces the real interest rate to zero
- That implies another 100 basis points down on funds
- We think 50 bps cut in March, another in April, then on hold for foreseeable
future
Global Growthh
In the meantime, though, the weaker-than-expected US prospects suggest that
the global growth outlook may also be faltering a bit. Indeed, US equity
markets have outperformed many of their non-US counterparts thus far in 2008.
Wasn't decoupling supposed to limit economic effects outside the US?
- US growth risks now more serious
- Decoupling plausible during soft patch, less so in outright US recession
- Many European indicators looking tired as well
- Recipe for synchronized sell off in markets
Bank of Englandd
We've just seen a second rate cut from the Bank of England. Is the British
outlook soft enough to continue moving base rates lower?
- Activity data are softening. But concerns about inflation linger.
- Situation similar to US
- Further easing to come from the Bank of England, but at measured pace
- Sterling near $2.00
Europe
Meanwhile the European Central Bank has only paid incidental lip service to
economic risks. Do you see the ECB reducing rates any time soon?
- Not imminently.
- Inflation concerns remain.
- But next move will be down.
- ECB will probably cut by 50 bps in 2nd half of year
Conclusion
Indeed, we have to remember in these challenging times that markets are often
very forward looking just as recent behavior of the euro suggests. In that
regard, equities already seem to have accounted for a quite difficult earnings
environment in 2008. Maybe the combination of fiscal and monetary stimulus
can help sentiment improve and begin to heal some of the market damage, even
if profits weaken as expected in the near term. From an asset allocation
viewpoint, neither cash nor bonds seem to offer a lot of value right now,
but emerging markets should continue to benefit from ample global liquidity.
Thank you Chris, as always, for keeping us up to date on the latest developments.
This material is for your private information.
The views expressed are the views of Chris Probyn and Dan Peirce only through
the period ended February 12, 2008 and are subject to change based on market
and other conditions. The opinions expressed may differ from those with different
investment philosophies. The information we provide does not constitute investment
advice and it should not be relied on as such. It should not be considered
a solicitation to buy or an offer to sell a security. It does not take into
account any investor's particular investment objectives, strategies, tax
status or investment horizon. We encourage you to consult your tax or financial
advisor. All material has been obtained from sources believed to be reliable,
but its accuracy is not guaranteed. There is no representation or warranty
as to the current accuracy of, nor liability for, decisions based on such
information. Past performance is no guarantee of future results.
Posted On: February 22, 2008
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