The Weekly View: Back From the Brink
In RiverFront's base case scenario, where Bush tax cuts are largely extended next year and the government subtracts less than one percentage point from growth (averting most of the 'fiscal cliff') we expect that the US economy will avoid recession but decelerate to the low end of a 'new normal'-like expansion pattern of around 1%. In our pessimistic scenario of policy inaction domestically and globally (especially from Europe and China) we think a recession is probable and could cause about a 2% drop in US GDP. Alternatively, if policymakers are able to act effectively, we believe the economy could rise 2% next year. At this time we assign about a 50% probability to our base case scenario, 30% to the optimistic, and 20% the pessimistic scenario. We had been more pessimistic until last week but with the ECB's stated commitment to preserve the euro, we have become more optimistic.
David Fuller's view I have little doubt that the ECB will preserve
the euro, in one form or another, but the problem of weak GDP growth due to
the ongoing financial crisis in the west remains.
Asian leaders have underestimated the extent to which their export markets have been compromised. The region's new focus on domestic consumption and its relatively recent monetary and fiscal stimulus has not yet gained sufficient traction to lift the global economy. Consequently, growth in corporate profits has slowed, even for many Autonomies.
Meanwhile, stock markets have experienced short covering since Mr Draghi's bold statement last Thursday. Investors are also anticipating additional stimulative measures from other central banks, not least the Federal Reserve.
Consequently, short-term indicators for the S&P 500, which is near the upper side of its range for the last two years, are somewhat overbought once again. So are other indices which have rallied recently. Therefore it would not be surprising to see a temporary pause but breaks of progressions of rising lows over the last two months would indicate technical deterioration. For the S&P this would occur on a break beneath 1325.
(See also Eoin's comments below.)