While the downward Q4 GDP revisions were inevitable courtesy of the government shutdown scapegoat (making a joke out of the sellside exuberance in late 2012 which had seen 3% growth some time around now,) starting first at Goldman, and shortly after at JPM both of which cut their Q4 GDP forecasts by 0.5% to 2.0%, we had yet to see the persistent bullish bias spill over into 2014. That just changed following an overnight cut by Bank of America of Q1 2014 growth estimates from 3.3% to 2.8%. Certainly, this is the first of many as once again optimism proves unjustified. But who can blame it: after all there will have been "only" 5 years of QE, and the Fed's balance sheet will be only $4 trillion at December 31, 2013, implying a S&P of 1800.
From Bank of America:
This week’s budget agreement was good news for the economy and confirms our baseline forecast. We had expected an agreement right before the October 17 deadline with no new fiscal austerity in the package, and that is exactly what we got. We have made a minor change in our GDP forecast: we continue to see just 2% 4Q GDP growth, but we have cut 1Q back from 3.3% to 2.8%. This reflects offsetting factors: government spending will bounce back in 1Q, but with new budget deadlines we expect mild confidence headwinds to persist into the quarter. Our Fed call remains the same, with a $10 bn tapering in January and with a later move more likely than a sooner move.
Looking ahead, the broad story remains the same. Growth in the last several years has been held back by three factors: structural healing in the private sector, fiscal austerity and confidence shocks. Looking ahead, confidence remains at risk but the structural healing is well advanced and fiscal drag drops significantly. At the same time, we think inflation is likely to remain below the Fed’s forecast, with abundant spare capacity in the US and globally, soft commodity prices and a strong dollar. This implies a super-slow Fed exit. We don’t expect QE to end until next November and we don’t expect rate hikes until the end of 2015.
The budget agreement sets three new deadlines. First, another bi-partisan Committee will be formed and is supposed to come up with a “grand bargain” by December 13. Second, the new continuing resolution will expire on January 15 and there will need to be a new agreement to avoid another shutdown. Finally, the new debt ceiling is on February 7. Let’s look at the likely outcome from these three deadlines.