10 things to consider when pondering a Double-Dip

1. The recovery in China and the US appears to be slowing to a ‘more sustainable pace’ rather than coming to a complete halt. The usual overreaction is being priced out.

2. After the EU stress test results the market has shifted away from the European financial woes and now focusing on US growth concerns. Investors are less fearful of an imminent sovereign default. They are content with the stronger German industrial numbers. With US growth data continuing to disappoint is pressurizing the dollar.

3. Is the US capable of dragging the world into a double dip recession? Yes, of course they are, but that fear seems exaggerated. To date, their recovery has been supported by massive policy stimulus, the turn in the inventory cycle, and the up-tick in global trade. It’s only natural that we would witness some slowing down as the stimulus begins to fade. Remember, Bernanke and Co. have some yet ‘undisclosed’ tools to play with.

4. Analysts are in agreement that investment and consumer spending is somewhat encouraging, as household real incomes and shipments of capital goods appear to be recovering. Yes, consumer confidence surveys seem to be soft of late. Let’s chalk the ‘lagged data response’ up to the equity markets. Global bourses are stabilizing as last month was a bumper month.

US+6% CAN +4.1% UK +8.1% FRA +6.4% Ger +3.% Jap +1.6% HK +4.6% Chi +9.5% and BRA +8%

Stable equity prices will lead to stable consumer sentiment surveys.

5. Only one sector is destined for double-dip status and that’s the US housing market. The crash has left activity at such low levels that analysts believe that the sector ‘is now less important for the wider US economy’. The market has aggressively deflated ‘over-valued’ house prices. There is limited downside from here. However, shadow inventory could be a problem.

6. OK, 2nd Q GDP in the US is +2.4% and with growth targets being revised downwards are not reasons to push us into a double-dip situation just yet.

7. For some, China’s data will always be questionable. In reality, their growth probably peaked last year. Markets have been slow to pick up on this because we compare the flattering headlines with the worst of the recession. Everyone continues to wait, and wait even more for their property bubble to burst. Not saying it cannot or will not happen, but only in local hotspots.

8. China does not warrant a tightening cycle. The PBOC is sitting pretty, with inflation pressurizes easing, coupled with a strong budget they are in a unique position of having the ability to loosen policy if this slowdown morphs into something ever so sinister again.

9. The market, investors, all of us should not fall foul to ‘ostrich syndrome’ when it comes to Europe. The global recovery is weak and has a long way to go. The Euro-zone is not in the clear just yet. Germany cannot shoulder the rest of its members alone. Its export led surge needs help.

10. Now what of the dollar? Last month it was painful for the bears, so much so they have been questioning their own trading habits. Bigger picture and excluding all the intraday trading noise, the dollar should climb vs. the EUR. The US recovery is weaker than most wanted, but, importantly, there is one. A growth pattern that does not come with the baggage similar to the EU who are facing the challenge of keeping the own member zone together.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell