Equity markets were mixed yesterday after the FOMC's unexpected dovish statement – notably that the Federal funds rate is likely to remain unchanged at least through to late 2014, versus the previous guidance of stability in interest rates at least until mid-2013. Although European stocks were up, in most cases by more than 1%. US market performance was flatter. Meanwhile, sterling, as well as emerging market currencies, appreciated against general USD weakness.
Today attention remains on the US with the release of the first estimate of Q4 GDP. There has been a noticeable improvement in US economic indicators in the final quarter of 2011. This has been broad-based, with activity, consumer and business sentiment and labour market data general ly printing stronger than expectations. And notwithstanding this week's softer house sales data, the housing market has also improved. Reflecting this, annualised Q4 GDP growth is predicted to be slightly above 3% in the final quarter of 2011, up from 1.8% in Q3 and the fastest since Q2 2010.
However, a key upward contribution in Q4 will come from a rebound in inventories. This is unlikely to be repeated in H1 2012, indicating a slower pace of expansion ahead. Nevertheless, we have raised our forecast for US 2012 GDP growth to 2.6%, from 2.2% previously. We believe the main downside risk to the outlook comes from an intensification of tensions in the euro area which could damage returning consumer and business confidence. A stronger-than-expected rebound in business and residential investment is the chief upside risk, reflecting potentially strong pent up demand.
Stronger US GDP growth forecast for Q4 2011
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