© Sean Incremona
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The US economy had a poor start of the year, growing just 0.2% on an annualized basis. Economists believe much of the weakness was down to bad weather, and that growth will return to its 2014 levels during the remainder of the year. Do you agree with these economists and are you positive on the US economy in particular?
There was a confluence of factors affecting Q1 GDP in addition to weather, such as disruptions from the West Coast ports dispute and impacts from lower energy prices and the stronger USD. The latter two will be more persistent while low energy prices deter investment in the sector and the USD is a negative for net exports. These effects are generally expected to wane – especially given the recent market corrections. Growth is expected to recover later in the year while we continue to see sturdy underlying dynamics with resilient labor markets supporting consumer spending, though relatively high inventory levels could also impede the prospect for an immediate snapback in headline Q2 GDP similar to what we saw in 2014.
While US is supposed to be in a period of recovery from the Great Recession, the economy has been lagging more than expected lately. Does this lack of growth mean US economy is slipping back into a recession?
We do not see the US slipping back into a recession. As mentioned above, underlying growth dynamics remain sturdy despite the influence of recent ‘transitory' factors. At this point the expansion is more likely closer to mid-cycle opposed to late-cycle.
A lot of economists' average forecasts from March suggest the Fed will raise rates twice before year-end. While economists generally predict modest hikes in September and again in December, futures traders do not expect the Fed to tighten until December or later. When do you personally believe the Fed may raise rates and how it will influence the nation's market?
September is the mostly likely timing for the Fed to raise rates at this point. We see a rate increase in 2015 as highly likely, unless there is a negative shock in the economy. Markets will have to adjust to this reality given the recent propensity to whittle down market pricing. This could result in renewed upside in the USD and a gap higher in yields, as well as a temporary pullback in stocks.
What will be the major drivers for the US Dollar and what are your forecasts for EUR/USD, USD/JPY and GBP/USD for Q3 and for the end of this year?
Positioning and relative economic performance will be main drivers. For instance, the short squeeze we have seen on the EUR is an example of a stretched USD long "consensus" trade that is unwinding amid recent soft data from the US and constructive signals out of the Eurozone. Yield differentials will also play a part as Fed expectations have been pushed back to open the door for broader USD weakness. We would look for better economic data out the US in coming months to help the USD resume a strengthening trend at a more measured pace relative to the acceleration in late 2014/early 2015.