US recovery losing steam?

The US economy has avoided a serious slowdown and recovered from the mid-11 weakness – there is no doubt about it. Positive surprises begun to flow back in September and then became a norm. The trick is that investors – encouraged by that string of positive data - might have overestimated the outlook. The first warning came in mid-January when the Philly Fed came out and yesterday those warnings mounted with both: Chicago PMI and the Conference Board sentiment index not only failing to meet expectations but also retreating noticeably from values recorded a month ago.

That should not be overly stunning as the environment is not favorable and the outlook for growth is still mixed. However, US equities rallied by some 20% since early autumn and with expectations elevated (we mentioned that the consensus assumes the S&P500 earnings to grow by 14% this year and nearly 13% next, which seems very, very optimistic) it might be time for some moderation.

What we saw recently is merely a small profit taking. The key supports on S&P500 futures: 1289 pts. and a trendline drawn along local lows from November and December have not been even tested. Only breaking those supports could prompt a larger correction.

EURUSD – H&S on H4

Yesterday we wrote about a clear trendline on H4 supporting bulls in the short term. This line has been broken and the pair is testing a key level of 1,3075. It is worth noticing that this is also a test of a possible H&S formation, so should the level fail, bears could get a double encouragement and lead the pair to 1,2880.

Przemysław Kwiecień PhD, Chief Economist

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