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US banking sector now in rude health as credit worries lessen

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The impact of the poor weather in the US in Q1 is making it more difficult to judge the short term trends, says Heartwood Investment Management…

To some extent the impact has been greater than expected and therefore the degree to which lost sales will be recovered subsequently remains hard to judge. There will always be some permanently lost sales, in restaurants for example. Other items may merely be postponed. The recent data for auto sales in the US for example have been very strong indeed, giving cause for optimism. Therefore, we remain broadly optimistic for global growth as 2014 progresses.
 
“Fundamentally, the recovery in the US economy appears most advanced given the broad based fall in unemployment so far, though there is further to go to satisfy the Federal Reserve that recovery is entrenched. There is also the general perception that the banking sector is now in rude health and small business surveys suggest that there is no longer an acute shortage of credit. Bank lending surveys also suggest loosening conditions for business which is a positive given that smaller companies are responsible for most employment growth. The US expansion also appears to be broad and sustainable. Nonetheless, the US Federal Reserve has emphasised time and again that it will be careful with the ongoing tapering of monetary stimulus. It has also ‘moved the goalposts’ with respect to employment targets and will now take into account a broader range of factors when judging policy.
 
“In Europe the region remains in a very low growth environment. Inflation is low and the ECB has taken further steps to underpin inflation expectations. The specific targeting of bank lending to the non-financial private sector should be helpful. Furthermore, the emphatic reiteration that the ECB is ‘not finished’ is important as the fledgling recovery broadens. Overall however, the adjustment process within the Eurozone continues slowly and painfully, yet is definitely taking place. We acknowledge that risks are elevated, especially in the event of an external shock; however signs of stress are abating.
 
“Similarly, the world watches as the adjustments begin to take place in China and here too, we expect gradual progress as the economy downshifts in growth and transitions towards a more consumer based economy.”

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