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Strong Fundamentals Outmatched by Weak Sentiment

Tuesday, 8 Jun 2010 | 4:08 AM ET

It has been difficult to get away from the doom and gloom in recent days as investors fretted over the euro-zone debt crisis and the thought of what the U.S. economy would look like without huge stimulus from the Treasury and Federal Reserve.

Monday night there was some hope for the bulls from Barclays Capital. Economists at the UK investment bank raised forecasts for U.S. gross domestic product growth on the belief that consumer spending will rise more quickly than previously thought.

"Although the rise in private sector employment was weaker than expected, the cyclical recovery in the labor market is gathering pace." BarCap wrote in a note to clients.

The bank now expects second quarter growth to hit an annual rate of 4.5 percent, saying the Institute of Supply Management manufacturing survey, industrial production and durable goods orders all point to a strong end to the first half.

"Consumer spending growth has picked up and is outpacing growth at the same stage of the recoveries in 1990 and 2001. This is reflected in retail sales and vehicle sales numbers, too. However, income growth continues to lag relative to previous cycles, but should pick up in the coming months as employment growth rebounds," Barclays said.

James Barty, the head of macro strategy at Arrowgrass Capital Partners in London, agreed with BarCap, saying Friday’s jobs number was strong and pointed to 4 percent growth or more in the second quarter.

Unfortunately for the bulls, Barty said it is very difficult to make money trading the macro fundamentals at the moment.

“The data is all saying we are fine," he said. "Apart from some weakness in the Spanish and Greek manufacturing sector, which is not important to global growth, the data is strong across the board."

"Unfortunately investor sentiment is dominated by fears over a sovereign debt crisis and the health of the European banking system," he added. "Eventually the doom mongers will be wrong but it will be some time before we get back to trading on fundamentals."

Goldman Sachs' chief economist revealed he has finally given in to the doom and become a "grizzly bear." Having dismissed the impact of the euro zone debt crisis on global growth for months, O’Neill has now found 10 reasons to be negative as the debt crisis took hold of investor sentiment.

"Cutting deficits for the sake of it, without involving supply-side steps to boost growth (is) not a good idea, especially where demand is weak," he said.

"The absence of significant supply-side reforms in large parts of the developed world mean weak trend growth and deflationary pressures persist," he added.

O'Neill is also concerned about the euro .

It's one thing for the euro to cyclically decline, but another when it's because the euro zone itself that is under doubt, he said.

Contact Europe: Economy

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