US economy will continues to stumble: Rabobank

Adrian Foster, Rabobank, Head Financial Research, says that that there was some activity in the first quarter which made the first quarter look stronger than it was in the US. The effect is now wearing off and the real data indicating a more downbeat picture have begun to emerge.

Fed must have been disappointed with the US recovery rate. At the moment, QE3 is not the likelihood but if the data flow is lackluster continuously for over next couple of months then there will be a need for third bout of QE in the US. Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video. Q: What do make of the economic data that has been released over the last few days, particularly from the US where the momentum has slowed down significantly from earlier in the year? Do you think the cycle is bottoming out right now and start picking up in late August? Do you expect this weakness to continue throughout the year?
A: There are two elements to the weak picture from the US. The first is that there was some activity in the first quarter which made the first quarter look stronger than it was. The effect is now wearing off and the real data indicating a more downbeat picture have begun to emerge.
So, this is what one should keep in mind regarding the negative data coming in at the moment. And it is quite likely that as the summer progresses the picture will be more downbeat owing to the negative data flow.
Of course, with the Eurozone facing its own challenges and China struggling with slower momentum, it makes sense that the US economy will continue to stumble along at a sub trend growth rate.
Though there are discussions that the US is relapsing into a recession, I don't think that will pan out. The services sector PMI from the ISM to come out of the US is expected to send a reminder that the services sector, which is about 77% of the US economy, continues to expand at a reasonable clip with a reading of 53.5. This would signal that the US economy will continues to stumble along at a sub-trend growth rate. Q: Do you think the Fed will react to the slowing growth in US?
A Fed must have been disappointed with the US recovery rate. At the moment, QE3 is not the likelihood but if the data flow is lackluster continuously for over next couple of months then there will be a need for third bout of QE in the US. Q: How do you think investors will react this month with Greek election results on cards and some QE announcement or otherwise from the Fed? Given the past record of Eurozone politicians, it would be a sensible idea to buy into the panic because they seem to avert when it comes to the brink?
A: Correct. The challenge is to find the target when the panic has reached its crescendo. An inter-European difference between stronger countries, particularly Germany and the weaker countries is a problem. They have the capabilities and the policy tools to continually crawl back from the brink. Q: What is your take on commodities? 
A: There will be a subdued outlook. Periodically we will find ourselves looking over a cliff and commodity prices I think would be down. I think that will be a good time to stand back, look again at the option confronting European, the US and Chinese policy makers.
There is some scope for China to boost their economy. Euro zone policy makers don’t have much to boost their economy. Commodities will represent some good buying opportunities at the times of heightened market tension. Q: There is news that Merkel is pushing for a fiscal and banking union. Do you think we can look with confidence that they are coming up with such a plan or is it largely talk at this point and anything material will take a very long time to clear?
A: We all need to take a reality check. Europe now or Greece in particular has been in the headlines for well over two years, so it is very much a drawn out process and will continue to be. Currently, a fundamental conflict is going on in the Eurozone and I think the tension will continue to play out.
 I think when sectors, possibly the Spanish banking sector will be at the weakest point there will be some smudge on the degree of core support and I think support will be offered in sector specific areas.