The main reasons include an ongoing decline on the housing market and expanding foreign trade deficit. Residential construction declined 17% y-o-y in Q107. Business investments were weak, up 2% on a 3.1% decrease in Q406 and equipment and software expenses only grew 1.9%. The Beige Book (the Fed's report on regional banks) pointed to modest economic growth and an ongoing decline on the housing market. The bigger share of defaults on high risk mortgages could result in excess supply of houses on the market. This in turn could further depress the situation. Consumer demand remains the only strong point in the economy. However, actual signals have shaped up which underscore that problems, initially located on the housing market in the processing industry have spilled over to the entire economy.
For the time being, all the announcements of the Fed's spokespersons underscore that high inflation represents a key risk, while weaker economic growth could pick up in H2. The situation with inflation remains unchanged. The next meeting is scheduled for May 9. Market participants are nearly 100% confident that the lending rate will be left unchanged at 5.25% at this meeting. However, investors wait for new valuation of the balance of recession and inflation risks. Futures traders view the likelihood of an interest rate cut by August at 25%.
We view the US GDP report as negative for international markets, since this sends another signal about a possible recession in the US which could depress demand for commodities and trigger outflow of investor resources from risky EM assets.
0.553
1.6
