First, the political calendar makes it likely that the Fed will want to keep a low profile in the second half of the year's campaign season. If the window for a policy move closes by June, the hurdle for action is lower before then.
Second, economic slack persists and inflation is running below the Fed goal in its medium-term projection. The dual shortfall from its mandate provides both justification and political cover for action.
Third, the decision-makers at the core of the FOMC have consistently pointed to reasons why the performance of the economy will be subpar and at significant risk in the near term. Here, too, at Morgan Stanley, we share the view that the fillip to economic growth associated with a restocking of inventories is fading and that real GDP growth will slow notably in the current quarter. Anxiety-inducing headlines that the economy is losing steam would be conducive to Fed action.
The most likely form of that action is open market purchases of Treasury and mortgage-backed securities funded through the creation of reserves - Quantitative Easing 3 (QE3) - at the April or June meetings. We expect it to total around $500 billion to $700 billion. Such a program would dovetail with the expiration of the ongoing Operation Twist at the end of June.
An attractive alternative to the Fed would be to expand the scale and scope of that existing program - that is, announce Operation Twist 2 (OT2). It could stretch purchases out until the end of the year, implying total new purchases of about $400 billion, and include MBS as well as Treasuries. Moreover, the Fed would use the tools of monetary policy to sterilize the effects on the balance sheet. Those tools include continuing to sell shorter-term Treasuries and arranging temporary reserve-draining operations. OT2 would allow the Fed to act sooner, say at the March or April meeting, and frame the initiative as support for the ongoing economic expansion. It would also buy some insurance from criticism by keeping the overall size of the balance sheet unchanged.
We made this Fed call late last year (see Fed Thoughts for 2012: Into the Heart of Darkness, December 27, 2011), and the first order of business is to mark it to market in light of what we've since learned. In the event, data, particularly those describing labor markets, have come in stronger than we expected. The Fed's core policy-makers, however, have sounded dovish in almost every public utterance. On balance, the logic for additional Fed action still seems compelling.
Why, then, has the expectation of action fallen out of the consensus? The answer hinges on an assessment of the economy's momentum, a careful reading of the latest FOMC minutes, and an understanding of the Fed's conduct in anticipation of an adverse turn of events. Of course, there is the possibility that we could be wrong, which is why we end with some discussion of the one-in-four chance that the Fed stays on hold in 2012.
What Have We Learned?
The Morgan Stanley outlook is that the US economy will expand this year and next at around a 2% rate, about that of potential output growth. Unfinished business from the financial crisis leaves the mortgage market impaired and households needing to improve their balance sheets. This balance-sheet improvement is likely to come the hard way - by increased saving - rather than through significant capital gains on equity and real estate holdings. This is because the forward calendar is chock-full of events in the US and Europe that may set back global financial markets and the economy. As a consequence, we think investors will not retain a durable-enough conviction about fundamentals to support an extended market rally. Without a continuing boost from wealth creation, the economy grows at trend. If so, resource slack and inflation would move sideways.
This was our outlook in December and is still so in March. The data have been better, of course. Readings on the labor market, including initial claims for unemployment insurance, have been decidedly more upbeat. We know now that real GDP expanded at a 3% annual rate in 4Q11. However, about 2 percentage points of that growth owed to inventory stock-building. This is not the basis for sustained robust expansion, and as inventory levels settle down, we expect real GDP to slow appreciably. Indeed, our tracking estimate of growth this quarter clocks in at only 1%.
The Federal Reserve has seen these data and seems to share a similarly cautious assessment of the outlook, at least judging by the summary of the economic projections of FOMC participants that accompanied the January meeting. Thus, it has a medium-term forecast in which it falls short of both parts of its dual mandate of maximum employment and stable prices, a ready justification for additional policy action.
In other aspects of its communications, the Fed has been transparent in its intent. It apparently does not want market participants to get too enthusiastic about the outlook. Three specific aspects of its message deserve more attention.
Stronger incoming data have mostly been ignored by the Fed. There was almost no mention of favorable readings on activity and the labor market in the Fed's public statements earlier this year. Only late in the game, with the semiannual testimony to Congress, did Chairman Bernanke devote much attention to employment gains. No doubt, it would have been awkward otherwise to review economic developments over the past year without noting that the unemployment rate has fallen by 0.75 percentage points. Even so, the Chairman's reminder that "the job market remains far from normal" seemed to be the main takeaway. The Fed either does not accept that the pick-up in growth will be sustained or does not want market participants to get carried away in connecting the last few data points.
The emphasis is on the dark clouds, not the silver lining. Every Fed statement frets that "strains in global financial markets posed significant downside risk to the economic outlook". Deep down to their free-market bones, Fed officials are mostly euroskeptics who have trouble convincing themselves that a flawed currency union will survive. A general piece of advice from Fed economists working on the policy challenges posed by the zero bound to the nominal funds rate is that it is best to front-load policy accommodation if there is a significant risk of an adverse event. That way, the economy is on a stronger footing if the blow does strike. The political calendar makes this insurance motive more important: Since the Fed likely wants to keep a low profile during the height of the campaign season, it should be quicker to act in the first half in anticipation of adverse shocks.
Follow the Fed and do not worry about inflation. The Fed has signaled in multiple ways that it doubts that a pick-up in inflation is a material risk to the outlook. It excised the sentence referring to monitoring inflation and inflation expectations from the January FOMC statement. In the summary of economic projections for that meeting, it forecasts inflation to run below its goal in the medium term. This is not surprising, because the basic determinant of inflation in Fed-style models is resource slack, which it asserts is considerable. After all, policy-makers have not raised their assessment of the natural rate of unemployment or lowered their estimate of the rate of growth of potential output. For good measure, the Fed's inflation goal was raised a touch, to 2%, just to be sure that there was white space between desired and actual inflation.
Reasons We Are Not Wrong
Our three-in-four expectation of Fed action has moved out of consensus in the past few weeks. Some of the objections are easy to understand. After all, we also see a one-in-four chance that nothing happens. If the economy surges or equity investors continue to embrace risk, the Fed would cheerfully keep its plans on the shelf. Therefore, if we are undercounting the resilience of the US economy, we are also overestimating the likelihood of Fed action.
Some of the objections, though, seem off kilter. In particular, we push back against three leading questions whenever we are asked them.
Doesn't the Fed Need to See a Fall in Economic Activity before it Acts?
No. That notion is based on a misreading of the minutes of the January meeting. In the discussion of the views of all FOMC participants about whether additional balance-sheet changes were appropriate, we learned that a few preferred to act in 2012 and a number remained open to that possibility "if the economic outlook deteriorated". This phrase just means that their forecast of economic growth has to soften, not that the level of activity has to drop. Even more to the point, this characterization was in the back of the book, which discussed the views of all those who are surveyed - the five governors and the 12 bank presidents. What matters is the explanation earlier in the minutes that is limited to the ten voters. There we learned that a few members thought current and prospective economic conditions could warrant action "before long". Other members would support this if "the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate". In minutes math, a "few" plus "others" is likely a majority. Note that the first trigger only requires a slowing in economic expansion and that the second is already met in their published forecast.
Doesn't the Recent Run-Up in Oil Prices Take Fed Action Off the Table?
The Fed does have a problem because oil prices are 35% above their local bottom of October 2011. Such a run-up creates an uncomfortable tension for a central bank, in that headline inflation rises but spending gets hit because the US is a net importer of energy. However, Chairman Bernanke's academic work on the strong post-WWII association between energy price spikes and subsequent recessions puts part of the blame on the Fed's historical response. As long as inflation expectations are well anchored, the strong conclusion is that the central bank should ease policy to counter the blow to aggregate demand. Thus, the recent rise in oil prices and the risk that they go higher likely inclines the Fed to do more, not less.
How Can Fed Officials Believe That Further Balance-Sheet Manipulation Would Work?
It is their job. Fed officials do not have outsized expectations for the efficacy of their policy instrument. Rather, they feel a responsibility to use an instrument that most likely works in furthering their mission, even if those benefits may be small. Moreover, while the basis point consequences of asset purchases might be modest, the Fed wants to be seen by the private and public sectors as willing to act when there is a need. For households and firms, QE3 or OT2 might boost confidence. For the rest of officialdom, the Fed would show that at least one institution in Washington DC retained a sense of purpose.
Reasons We May Be Wrong
We see a three-out-of-four chance that the Fed acts as the data on growth soften and the rally in the equity market fades. If the Fed is in a hurry or feels no need to push up inflation expectations, the action likely takes the form of sterilized asset purchases, i.e., the one-in-four chance of Operation Twist 2. Recent public comments by Fed officials, along with press comments, make it more likely we are underestimating, not overestimating, their willingness to execute OT2. If the Fed needs to see some slowing in the economic expansion either to get internal agreement or external insurance, the policy initiative waits until the April or May meeting and more likely entails asset purchases that are funded with reserve creation. This policy, Quantitative Easing 3, which we peg at a one-in-two chance, would also be favored if the Fed desired more significant currency depreciation.
The remaining one-in-four probability of no action hinges mostly on a happy outcome for the Fed. It would not ease if it sees no reason to do so as payrolls expand robustly and equity markets extend their rally. This requires, of course, that politics at home and the ongoing sovereign and banking crisis abroad do not intrude.
The Treasury market ended an eventful week not much changed, with modest front-end gains and marginal long-end losses, as a poor run of economic data that pointed to slow growth in 1Q offset the impact of somewhat less dovish-than-expected testimony from Fed Chairman Bernanke. Ultimately, the market came out of the week pricing a more dovish Fed rate outlook, helped by Chairman Bernanke's clarification that the "exceptionally low" guidance does indeed mean 0-0.25%, and only suggesting a slightly lower chance or slightly later implementation of QE3 in small MBS underperformance, as he indicated the Fed might want to see more data before acting. Strong take-up at the ECB's second LTRO that initially boosted sentiment in Europe and lowered expectations for further ECB easing also weighed on Treasuries mid-week, but worries about the sovereign debt crisis were back on the rise Friday, supporting renewed flight-to-quality demand. Ratification and implementation of the second Greece bailout and PSI debt swap continued moving forward, but investors at week-end seemed to be increasingly concerned that settling the Greece situation for now might not create a firewall but instead might to some extent shift the focus of market pressures towards the other bailout countries. For the week, the Euro Stoxx 600 equity index gained 0.9%, helping the S&P 500 eke out a 0.3% rise, but the iTraxx Europe CDX index ended flat after reversing wider Friday as renewed pressure on sovereign CDS emerged, most notably in the two other countries under bailout programs. For the week, Portugal's upfront charge rose 1.375 points to a mid-market level of 34.25 points and Ireland widened 25bp to 600bp.
Domestically, poor data on capital goods shipments and orders, consumer spending, and construction spending in January led us to slash our 1Q GDP estimate to +1.0% from +2.2% even with more encouraging data pointing to improvement in February. After a slight upward revision to +3.0% in 4Q, this would leave growth at 2.0% annualized over the two quarters, which is where we see the underlying trend at this point, a pace of growth over time that would likely not be consistent with further declines in the unemployment rate. The last FOMC forecast was a bit more optimistic, but still muted, with a central tendency GDP forecast range for this year of 2.2-2.7%. And, overall, Chairman Bernanke's testimony didn't signal any meaningful changes in the Fed's outlook for subdued growth, slow progress in moving towards full employment, slightly below-target inflation, and continued risks to the outlook from Europe. We continue to think that additional Fed easing is likely to be announced before mid-year, when the ongoing portfolio extension program ends.
But against the weak indications for overall 1Q growth, another strong employment report for February is likely - our forecast is for a 220,000 gain in non-farm payrolls - and the four-week average of initial jobless claims in the latest week (which was after the survey period for the February employment report), hit a four-year low. This extended the "somewhat different signals received recently from the labor market than from indicators of final demand and production" that Chairman Bernanke discussed in his testimony. He suggested that the Fed would like to see more data to see how it is resolved, saying that it would be "especially important to evaluate incoming information to assess the underlying pace of economic recovery". We suspect that as we move into the spring a payback from the unusually mild winter weather, which we think has helped to boost job growth and some other data in recent months, will help to resolve this divergence. This should keep an announcement of additional Fed easing by mid-year on pace, in our view, but might push it out a bit later into the first half while the Fed waits for further confirmation of its cautious medium-term economic forecasts.
For the week, benchmark Treasury yields ended up modestly lower in the shorter end of the curve and slightly higher in the long end in quite a muted performance, given the number of key events during the week. The 2-year yield fell 4bp to 0.27%, 3-year 4bp to 0.39%, 5-year 5bp to 0.84% and 7-year 2bp to 1.38%, while the 10-year yield rose 1bp to 1.98% and 30-year 1bp to 3.11%. TIPS lagged as energy prices pulled back (front-month oil 3%, gasoline 1% and natural gas 8.5%), with the 5-year TIPS yield up 3bp to -1.38%, 10-year 5bp to -0.25% and 30-year 7bp to 0.80%. Our desk thinks short-dated TIPS look cheap, given how big the near-term carry boost is likely to be from the February CPI results. Our initial forecast is for a 0.5% gain in headline CPI in February in seasonally adjusted terms and 0.6% in the unadjusted index that TIPS are valued from, pointing to a big boost to TIPS principal through April.
Chairman Bernanke's testimony generally didn't suggest an urgency to implement new easing measures, but his clarification of the FOMC statement's policy guidance was supportive for the front end and 5-year notes. After some confusion created by the FOMC statement's guidance for "exceptionally low levels for the federal funds rate at least through late 2014" seeming to be in contradiction with all 17 FOMC members' forecasts showing a median fed funds target forecast of 0.75% at the end of 2014, which the FOMC minutes seemed to be trying to reconcile by suggesting "exceptionally low" could mean 1% or less, Chairman Bernanke made clear that it in fact means no change from the current 0-0.25% fed funds target after the confusion. This supported a modest dovish repricing of overnight rates in futures markets, though they still lean more towards the FOMC forecasts than the FOMC statement. The July 2014 fed funds futures contract gained 2bp on the week to 0.49% and the January 2015 contract 3.5bp to 0.76%. Meanwhile, mortgages underperformed Wednesday in initial reaction to the testimony but then did a bit better the rest of the week to only slightly lag for the week as a whole, not suggesting any significant shift in investors' expectations for QE3. Fannie 3.5s lagged Treasuries by only about 2 ticks and rallied slightly in absolute terms to leave current coupon MBS yields near 2.85%. Outperformance over the past three months is still nearly 2 points, and valuations still suggest that investors see an MBS-focused QE3 program as likely.
The LTRO results supported a significant further improvement in 3-month Libor over the past week and renewed expectations for a sustained further move lower in coming months after the market had been shifting towards starting to price the recent improvement as likely to end. Spot 3-month Libor moved down 1.485bp on the week to 0.47575% after only a marginal 0.25bp decline the prior week. This was the lowest fixing since mid-November after a relentless move higher from just above 0.25% in late July to a high of 0.5825% at the beginning of January, when the eased dollar lending terms implemented by the ECB and Fed and the ECB's LTRO started to work in easing strains in this key market. Big gains in short-dated eurodollar futures priced in further declines in coming months and less risk premium for renewed increases in the second half. The front March contract gained 4bp to 0.445%, June 11bp to 0.415%, September 11.5bp to 0.45%, and December 12bp to 0.49%. Our desk continues to think Libor could move down into a 0.30-0.40% range in coming months, given where sovereign CDS, bank CDS and FX-implied dollar lending rates have been trading. These moves drove a big narrowing in forward Libor/fed funds spreads, which supported a big narrowing in short-end swap spreads. The spot Libor/OIS spread fell 3-37bp, the March spread 5bp to 31.5bp, June 10bp to 29bp, and September 10.5bp to 30bp. Supporting by this narrowing in swaps financing costs versus Treasuries, the benchmark 2-year swap spread fell 5.5bp to 25bp, a low since August, 5-year 2.5bp to 25.75bp, and 10-year 2bp to 8.5bp.
Much worse-than-expected January data on capital goods shipments and orders, consumer spending and construction spending pointed to very sluggish growth in 1Q. Early indications for February consumer spending were a lot better, so the economy's not rolling over, but rising gasoline prices could be a significant headwind to further improvement in the spring. Real consumer spending was flat in January, a third straight unchanged reading. A near-record decline in spending on electric and natural gas utility bills has partly accounted for this weak run, and real spending on gasoline continues to move significantly lower in the wake of last year's oil price surge, hitting a 15-year low in January. In recent months, however, lower spending on energy items hasn't been deployed into other spending. This has helped to rebuild some savings, and sharp upward revisions to income growth in the second half of last year in the GDP report also put consumers on a more sustainable footing coming into this year. Previous data showed the personal savings rate plunging from 5.0% in June to 3.5% in November before partly recovering to 4.0% in December. The income revisions took away most of this drop, leaving the savings rate at 4.7% in December before a dip to 4.6% in January. This is probably around a sustainable level, and we would now expect real consumer spending to track real disposable income growth, whereas before we thought there would likely need to be more rebuilding of savings this year. Early indications for February consumer spending were quite strong, with motor vehicle sales surging to a four-year high of 15.0 million from 14.1 million, and chain store sales significantly beating expectations overall. Based on these results and an expected sharp price-related rise in gas station sales, we see overall retail sales surging 1.5% in February and the key retail control component gaining 0.6%, and we see overall real consumer spending jumping 0.4% after the stagnation over the prior three months. With a further 0.2% gain in March, however, this would only leave consumption for all of 1Q up 1.2%, below our prior +2.1% estimate.
Capital goods orders and shipments figures and non-residential construction spending data also pointed to sluggish business investment in 1Q. Non-defense capital goods ex aircraft orders plummeted 4.5% in January and shipments 3.1%. This followed big gains in December, +4.0% for orders and +2.8% for shipments, and these data are, of course, quite volatile. But core capital goods orders and shipments had been a showing a notable slowing in the second half of last year before the December pops. The more-than-complete reversals in January now make the December gains just look like temporary front-loading ahead of the expiration of full upfront depreciation expensing at the end of last year, reinforcing the softer trend. Over the past six months, core capital goods orders have now fallen at a 2.7% annual rate after rising 15.4% annualized over the prior six months, and shipments have risen only 0.8% after gaining 12.5%. This slowing began after the debt ceiling debacle in the US and intensification of the European debt crisis last summer, and fiscal policy gridlock in the US and the still unsettled situation in Europe are likely to remain sources of significant uncertainty through this year. Incorporating these results, we now see real investment in equipment and software rising 3% in 1Q instead of 8%. The outlook for the structures component of investment also looks a lot softer after a 1.5% drop in private non-residential construction spending in January. We now see structures investment being flat in 1Q instead of rising 10%. Taken together, these downward revisions lowered our forecast for growth in overall business investment in 1Q to +2.2% from +8.6%.
The cut in our 1Q consumption estimate to +1.2% from +2.1% and investment to +2.2% from +8.6% reduced our overall GDP forecast to +1.0% from +2.2%. 4Q growth was revised up slightly to +3.0% from +2.8%, and upward revisions to construction spending figures in November and December pointed to a slight further upward adjustment to +3.1%. This would leave annualized GDP growth over the two quarters close to +2%, which is where we continue to see the trend going forward over the next couple of years as post-bubble excesses continue to be worked off, shifting to government debt clean up from the private sector this year and next. A 3% result in 4Q and 1% result in 1Q would just be towards the upper and lower ends of a channel around that trend. Underlying demand does appear to have run slower than that recently. The bulk of the upside in 4Q GDP growth was accounted for by a 1.9pp boost from inventories. Final sales (GDP ex inventories) and final domestic demand (GDP ex inventories and trade) both gained only 1.1%. Our current 1.0% 1Q GDP forecast builds in a small improvement from that. We see final domestic demand rising 1.5%, net exports being neutral, and inventories subtracting a half point after the nearly two-point add in 4Q. So, we see underlying final domestic demand growth of only about +1.25% annualized in 4Q and 1Q. The much better indications for February consumer spending point to improvement heading towards 2Q, but rising gasoline prices could be a headwind in coming months, and we think it's likely we'll see some moderation in incoming data in the spring, including in job growth, in a payback from the boost from the unusually warm and dry winter.
Focus in the coming week will be on the employment report on Friday, delayed a week by the need to have at least three weeks after the survey week (which was the week ending February 18) to produce the report. Otherwise, the economic data calendar is light, with the most notable other release the trade balance report, also on Friday. We currently see net exports being neutral in 1Q, but this could shift significantly based on the starting point for the quarter provided by the January trade results. With the next FOMC meeting coming up on March 13, the Fed shifts into its black-out period after Monday, so there shouldn't be much Fed news while waiting for the employment report. Not much is expected from Thursday's ECB meeting either in light of the strong boost the LTROs have provided to financial markets.
In addition to the focus on the employment report Friday, data releases due out this week include factory orders Monday, revised productivity Wednesday, and the trade balance Friday:
* We forecast a 1.3% decline in January factory orders. Even with some price-supported upside in non-durable goods, the 4.0% plunge in durable goods orders, with core capital goods orders plunging 4.5%, points to the largest decline in overall factory orders in 20 months.
* We look for non-farm business labor productivity growth to be revised up to +0.8% in 4Q and unit labor costs to +1.9%. The measure of output relevant for this report was revised up a bit less then overall GDP, pointing to marginally better productivity growth than the originally reported +0.7%. But big upward revisions to income growth in 4Q and especially 3Q point to significantly higher growth in unit labor costs. ULC in 4Q will likely be revised up to +1.9% from the previously reported +1.2% and 3Q to +1.8% from -2.1%, which would boost the year-on-year rate to +2.5% from +1.3%.
* We forecast a 220,000 gain in February non-farm payrolls and a steady 8.3% unemployment rate. The recent performance of jobless claims has been quite encouraging, with the four-week average dropping another 21,000 on a survey-week-to-survey-week basis in February. Also, unseasonably mild weather across much of the country continues to prevail. Indeed, it appears that this winter will go down as one of the mildest in history. The last time we experienced somewhat similar conditions was the winter of 2005-06. In that instance, employment growth was quite elevated for a period during the winter months before sputtering once spring time rolled around in an apparent payback. In any case, available evidence appears to point to anther solid gain in February payrolls. Finally, although some observers misinterpreted the drop in the participation rate that was reported for January (not recognizing that there was a break in the series), the recent trend in the size of the labor force is admittedly somewhat puzzling. At this point we expect to see some normalization in labor force growth going forward, with a continued escalation in disability insurance applications being about offset by reentry to the labor market as conditions improve.
* We look for the trade deficit to widen another $0.5 billion in January to an eight-month high of $49.3 billion, with exports expected to be up 0.4% and imports 0.5%. On the export side, consumer goods should be boosted by a rebound in the volatile pharmaceuticals category after a big drop last month, and industry data point to upside in aircraft, but the durables report pointed to weakness in ex aircraft capital goods exports, and softer prices will likely restrain food and ex oil industrial materials. On the import side, oil prices moved higher in January, but Energy Department data point to an offsetting pullback in petroleum product import volumes, while port data point to a modest rise in ex oil goods imports.
Silver lining starts to shine... On a recent field trip to China, we noticed evidence of rising export growth momentum as well as a substantial increase in property transactions in major cities in the last few weeks, which we believe will help to cap the downside risks to growth in the near term. In addition, policy-makers indicated that existing projects of government-driven infrastructure investment have been prioritised, most likely lifting infrastructure investment growth in the near term from the low level seen in 4Q11.
...but a bigger push from monetary policy easing is needed. We highlighted an early start in policy loosening since the end of 2011, but we believe that monetary easing will have to step up to provide sufficient credit to the growth recovery. In particular, we noted that liquidity in the interbank market does not seem to have translated into notably looser financial conditions for the corporate sector, not least because of binding constraints such as the loan-to-deposit ratio and the direct control on loan drawdown.
More tolerance for property policy easing by stealth to come. The central government hesitates to withdraw property tightening policies, but we maintain our view that local governments will likely loosen the implementation of such measures after the NPC and CPPPCC towards the end of 1Q and early 2Q. Initial relaxation will likely benefit first-time property buyers, while leaving leveraged purchase for upgrade demand still constrained.
1. Downside Risks to Growth Capped...
We believe that some positive evidence has started to emerge of trends that could cap the downside risks to growth we have highlighted since 4Q11 (namely soft external demand, property market weakness and infrastructure investment deceleration caused by funding difficulties with local government investment vehicles). If we see further support from official data in these areas in the next one or two months as well as effective delivery of policy easing in implementation, the risks would likely be biased towards the upside with regard to our baseline forecast of real GDP at 8.4%Y this year.
I. Exports
Although January export growth seemed weak due to the Lunar New Year effect, we witnessed some positive developments in support of a small rebound in export recovery. These included: (i) better sentiment from exporters, as seen in the manufacturing PMI sub-index on new export orders; (ii) improvement in Korean exports, which tend to lead Chinese exports, especially the processing trade component; and (iii) improvement in US consumer demand in certain markets, e.g., furniture.
II. Property
In the last three weeks, both developers and property agents reported a strong pick-up in residential housing transaction volume in first-tier cities, despite the lack of policy change or price cuts by developers. It is possible that the better availability and lower costs of mortgage loans for first-time buyers compared to 4Q11 have stimulated some release of pent-up demand.
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