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Dr Brian Fabbri: Is The US Bull Gone?
Aspire, Thought Leaders | 12 May 2015
By: Lim Si Jie
Articles (169) Profile

The recent batch of economic data released during Q1 2015 did not meet the expectations of International Monetary Fund’s (IMF) optimistic forecast. In particular, the US economy which had been a key to the optimistic global growth forecasts, disappointed analysts in March’s non-farm payroll.

According to Dr Brian Fabbri, IMF’s US Gross Domestic Product (GDP) growth forecast of 3.4 percent Year-on-Year (YoY) growth now “seems impossible to attain.” Dr Brian even went as far as forecasting that US growth in Q1 2015 will be “less than 1.5 percent.”

Manufacturing Activity Slump

Regional economic production indexes have stalled while national indices, including the national Institute of Supply Management (ISM) index, have been declining. Factory orders have been decreasing in three of the past four months. The slump in manufacturing activity has caused significant pain to the business sector.

The weak industrial output coincided with the significant appreciation of the Dollar. The stronger Dollar eroded US’s international competitiveness and will begin to widen the trade deficit once the effects from falling oil prices fades.

No More Large Fiscal Spending Like 2008

US fiscal spending has been flat for several years due to the gridlock between political parties in the US Congress. Dr Fabbri expects the lack of fiscal spending will continue to be a significant drag on economic growth in the US as the congress continues to struggle in political stalemate and quagmire.

Falling Consumption

Source: Dr Brian Fabbri

Despite real spending rising by 0.5 percent over the last three months, personal consumption decreased. Monthly retail sales have also been falling for three consecutive months.

Real consumption accounts for almost 70 percent of US’s GDP but the falling consumption points towards a “massive deceleration in economic growth,” notes Dr Fabbri.

While consumer confidence remains close to a cycle high, Dr Fabbri highlights that upcoming non-farm payroll growth will dictate future consumer confidence and might possibly “damage confidence and undermine spending further.”

Expectations Of Rate Hikes Declining

Source: Dr Brian Fabbri

The negative data has caused the US markets to move sideways in the past few months. Dr Brian points out that the yield curve “traditionally flattens on expectations of the Fed tightening policy by raising short term interest rates.”

Interestingly though, the Treasury yield curve has stopped flattening recently. The yield curve did flatten significantly at the end of 2014 as the market was expecting the Fed to raise interest rates in June 2015.

However, the market now expects the rate hike will only happen in October, at its earliest. Even then, the trajectory of subsequent rate hikes will increase much slower than expected.

Cash Is King, For Now

The upcoming economic data release will be vital in the assessment of the US economy’s health and whether there is enough to warrant a raise in interest rates.

However, with the bulls in US markets tapering off, many investors are staying on the sidelines instead, awaiting to participate only in a more favourable market. You should too.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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