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US: Better economic momentum in 2016? - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 20, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Nomura suggests that the US incoming data point to GDP growing below 1% to end the year, raising doubts of better economic momentum heading into 2016.

    Key Quotes

    “We expect GDP to grow less than 1% in Q4. Incoming data point to further inventory drawdown at year-end, which should be a substantial drag on growth. Furthermore, readings on consumption, trade, and housing all suggest activity slowed from its previous pace in Q3. As such, excluding inventories, final sales appear to be on pace to grow around 1.2% in Q4 and raises some downside risk for growth in early 2016.

    Further out in the outlook, we expect GDP to grow slightly above 2% for several quarters before winding down closer to potential growth. But there are several headwinds that should weigh on growth. The renewed decline in crude oil prices will likely hold down business investment in the oil and gas extraction sector. Also, our estimates suggest that the changes in the value of the dollar and, to a lesser degree, weaker foreign growth prospects, will have a long-lasting effect on growth through their impact on net exports.

    On the upside, consumer activity has been, on balance, solid in 2015 and will likely continue to be the main source of growth in the near term, offsetting some of the weakness in the industrial and trade sectors. In addition, we expect residential investment to remain steady as favorable demographics should keep demand high.

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

    Inflation: We expect the drag from the stronger dollar and lower oil prices to dissipate in the coming quarters, and inflation should return closer to 2% by the end of next year. As the output gap narrows, we expect core inflation to trend higher.

    Policy: At the 15-16 December FOMC meeting, the Committee voted to raise the federal funds target range by 25bp to 0.25-0.50%. Given our expectations for the economy and inflation in 2016 and the uncertainty surrounding the evolution of financial conditions, we believe that the second rate hike is more likely to come at the June meeting than the March meeting, although this is a close call.

    Risks: Geopolitical uncertainty, slower global growth, the appreciating dollar, declining oil prices, and tighter financial conditions remain the key risks to our outlook.”
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