No Double Dip, No Deflation: RBS

Following a number of strong earnings reports that includes encouraging outlook, the economy is not "headed for either a double dip recession or a deflationary malaise," according to Royal Bank of Scotland.

"We expect GDP growth of at least 3 percent in the coming six quarters and a very slow pick up in inflation," John Richards, the head of North American strategy at RBS, wrote in a note to clients.

That's double the rate that economist Noriel Roubini of Roubini Global Economics predicted for US GDP growth for the rest of the year.

"The recovery remains fragile, so the (Federal Reserve) will continue to insure against the economic downside by keeping rates low, longer," Richards said. "The recovery won't pass the Fed's sustainability test until mid-2011, even in our optimistic scenario. The first tightening will happen in the second half of 2011."

"In such a low-longer monetary policy environment, 10-year US Treasury yields could fall to 2.75 percent by year end and the curve will continue to experience rolling flattening," Richards said.

With talk of further easing of monetary policyby the Fed on Aug. 10, Richards said demand for corporate and mortgage issuance is reviving along with an increase in risk appetite.

"This and an expected lessening of double-dip concerns, will likely keep rates in their current relatively narrow trading range for another month or two," he said.