Markets await return of consumer while economy stumbles

Comment by Stuart Thomson, economist at Ignis Asset Management "The employment report provided further evidence that the US economy has moved from depression to recession with the help of enormous fiscal and monetary stimulus, but it would be wrong to assume that we will move seamlessly to recovery without further stimulus from the Fed. The rebound in inventories has driven the improvement in business confidence, but there is likely to be a gap before final demand accelerates. Academic studies show that this final demand will have to be provided by consumers. The decline in weekly consumer confidence is evidence that consumers are concerned about rising commodity prices and mortgage rates and this week's retail sales data is expected to show that they are not ready to resume their traditional role of buyer of last resort.

"There is a clear risk that the economy stumbles over the summer as markets await the return of the consumer. The extent of this stumble will depend on whether the Fed is willing to resist the rise in mortgage rates. The danger is that the Fed views the rise in the spot yield curve as evidence of recovery and allows it to continue and the resulting tightening of financial conditions causes the recovery to fall flat on its face.

"Ben Bernanke's speech provided little indication that the central bank was prepared to accelerate QE purchases of treasuries. This risks even higher yields and Dollar recovery. However, we believe that more QE is inevitable and this should result in further currency weakness."