Concern over nature of US ‘recovery’

OVERALL the performance of Alan Greenspan mid week, when he announced the latest cut of 0.25% in US interest rates, was more crucial to global sentiment than the cut itself.

Back about a month ago some were speculating that a cut of 0.75% might be a possibility from the Fed. That was never going to happen, but it is still a measure of the level of nervousness in the markets about the precise state of health of the US economy that some thought such an interest rate gesture might be required to get the US economy up and running again.

The good news is that Mr Greenspan the equivalent of our central bank governor, except for the fact that he is the most powerful of all central bankers, did nothing to add to the level of concerns about the nature of the “recovery” in the US.

He chose his words carefully and talked of disinflation, and not deflation to the relief of the markets.

Had he landed on the deflation square stockmarkets would most likely have taken a very sharp dip and who knows what point they would have ended back at before the sell off subsided.

But the good news is that the US Fed chairman did not and on balance he seems to have guided global sentiment to the conclusion that, on balance, recovery and not recession looks the stronger possibility before the year is out.

But the debate is far from over and the future far from certain.

Prior to the latest cut Greenspan previously indicated the government could buy back 30 year bonds as another means of boosting growth.

That statement saw the cost of borrowing for house buyers decline in the US as the yielded on bonds fell making it cheaper for new and existing mortgage holders to fund repayments.

In effect it meant more money in the pockets of the biggest drivers of the US economy and it was seen as very positive given that as a block consumers account for 75% of the economy.

The commitment to buying bonds went down very positively and sentiment then rallied.

But perversely the slightly bullish tone from Greenspan last Wednesday about the outlook, has led the markets to conclude the US government will not have to buy bonds after all triggering a sell off of bonds, pushing up the yield and removing over night the prospect of substantial re-mortgaging. taking place at lower costs to the consumer.

But the debate moves on. As the period of second quarter reporting from the US corporate’s beckons, eyes will be firmly fixed on the statements accompanying the results and the sentiments expressed in them.

Most analysts are expecting pretty flat figures, not surprising given the still depressed state of the country, but they will be keen to hear what the CEO’s have to say about the outlook for the rest of the year.

Hopefully there will be a bit more certainty after the reporting for the second quarter is out of the way, which could then result in global sentiment shifting to a very positive mode.

But on the basis of the available evidence that is far from a given answer, we would be wrong to rush to any conclusions just yet.

After all first quarter growth in the US has been revised down from 1.9% GDP to 1.4%.

If the second quarter company results do nothing to bolster sentiment and admit they see the future as still cloudy, lacking clarity regarding future earnings in other words, then do not be one bit surprised to see negative global sentiment return and the stock markets take a pounding.

On the face of it markets have risen on the back of very little positive sentiment since March and are up generally by about 20%.

Though still off about 30% from their last highs, the reality is that investors have bought back in on the basis of pretty thin sentiment and we could still face turbulent times ahead.