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US: Better data, but not out of the woods – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 28, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at Nomura, notes that the recent data suggests that the US growth is picking up in Q1, but financial conditions and weakness in the industrial sector remain key risks.

    Key Quotes

    “Personal consumption and residential fixed investment came in stronger than our expectations in Q4, which suggests better momentum heading into 2016. Investment in oil and gas drilling activity declined further to start the year. But given the already low level of investment in this sector, the negative contribution to growth should be more modest than in the past.

    Low oil prices and a strong dollar hampered manufacturing activity last year, but there are signs that activity may be picking up, albeit modestly, in early 2016. Industrial production for February showed core manufacturing activity starting to trend higher. Also, recent manufacturing surveys suggest that the industrial sector may have hit an inflection point and could potentially gain some modest momentum in 2016. However, the pickup could prove to be choppy as the recent durable goods report showed some negative payback in February after strong gains in January.

    Taking all of these factors into account, we expect growth to rebound modestly in Q1 2016 to around 1.3% before reaccelerating closer to 2% in Q2. Thereafter, in the second half of 2016, better consumer spending and some rebuilding of inventories should push growth above 2%. In 2017, we expect growth to gradually slow closer to potential growth.

    Job growth bounced back strongly in Q4 after slowing somewhat in Q3. But further out in the outlook, we expect job gains to ratchet down as growth stabilizes around potential.

    Inflation: We expect the drag from lower oil prices to mostly dissipate by the end of this year, and inflation should return to around 2% by next year. We expect core CPI inflation to remain around 2%, while we expect core PCE inflation to trend higher due to higher healthcare prices.

    Policy: Given our expectations for the economy and inflation in 2016, as well as the uncertainty surrounding the evolution of financial conditions, we believe that a second rate hike is likely to come at the June meeting. After that, we expect one additional hike in 2016 and a total of three hikes in 2017.

    Risks: Geopolitical uncertainty, slower global growth, the strong dollar, low oil prices, and tight financial conditions remain the key risks to our outlook.”
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