Market Talk

All the tailwinds of H1 will become headwinds in H2. As state and local governments keep retrenching and even the federal stimulus diminishes, the fiscal stimulus will turn into a fiscal drag that will be much more pronounced in 2011 and after some of the 2001-03 tax cuts expire. The base effects from the lousy economic activity figures of 2009 are gone, temporary census hiring is finished and tax incentives—cash for clunkers, the investment tax credit, the first-time homebuyer tax credit and cash for green appliances—have all expired after “stealing” demand and growth from the future.

Currency trading volume around the world has hit $4 trillion a day, fueled by investors in the wealthiest nations looking to diversify beyond their home markets in a time of economic turmoil. The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements. The debt crisis likely boosted trading volumes in the euro in the latest survey. But the continued rise in trading reflects the increased globalization of investing.

The pace of consumer spending picked up in July, even as income growth remained tepid, signalling that demand is holding up in spite of persistent unemployment and a wavering economic recovery. Personal consumption expenditure rose 0.4 per cent last month. The increase was bigger than economists had projected and purchases were concentrated on long-lasting durable goods such as cars.

Subpar recovery in housing had been our expectation but this week’s existing and new home sales data reinforced that the old themes of consumer deleveraging and the long-term workout for the U.S. economy remain in place. Our outlook for the second half of this year is for sub 2 percent growth and housing continuing its slow workout. Real growth in the second quarter was revised down to 1.6 percent due to weaker trade and inventories.