Bill Gross of PIMCO : U.S. Nearing Recession / QE 3 – Goldman Forecast

In 1935, Cret designed the Seal of the Board o...
In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

July 17

In his Twitter feed  the King of Bonds has  a sobering forecast:

Business Week  picked up the stiory and added the forecasts for The Fed to enter QE 3

Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said the U.S. is approaching a recession as BlackRock Inc. (BLK) (BLK) expects the Federal Reserve to take more steps to support growth.

Five-year Treasury yields slid to a record 0.577 percent yesterday after an unexpected drop in U.S. retail sales rekindled speculation Fed Chairman Ben S. Bernanke will use testimony today to hint at further monetary easing. That followed data earlier this month showing American employers added fewer-than-estimated workers to payrolls. Goldman Sachs Group Inc. (GS) (GS) and Deutsche Bank AG cut forecasts for U.S. growth.

The U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits,” Gross, who manages the $263 billion Pimco’s Total Return Fund (PTTRX) (PTTRX), wrote on Twitter yesterday.

Ten-year Treasury yields added one basis point to 1.48 percent as of 4:11 p.m. in Singapore, compared with the all-time low of 1.44 percent reached June 1. The MSCI World Index (MXWO) of shares rose 0.2 percent.

Bernanke will present his semi-annual monetary policy report to lawmakers in the Senate and House of Representatives today and tomorrow. He said on June 20 that the central bank will be prepared to take more steps, including additional asset purchases, if the labor market doesn’t improve continuously.

Everything ‘Weaker’

Retail sales fell 0.5 percent in June, figures from the Commerce Department showed yesterday, exceeding the most pessimistic forecast in a Bloomberg News survey. U.S. employment increased 80,000 last month, according to a Labor Department report, trailing the 100,000 increase projected by economists.

“Pretty much everything is way weaker,” Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, told reporters today in a teleconference from London. “There will be some more action from the Federal Reserve, but not probably dramatic action in a sense of massive stimulus.”

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from 2008 to 2011, seeking to cap borrowing costs and bolster the economy. Last month, it expanded the program known as Operation Twist that replaces short-term Treasuries in its portfolio with longer-term debt.

With U.S. debt yielding nears record lows, Treasuries are “already expensive,” Cameron-Watt said. The securities have returned 5.2 percent this year on an annualized basis, which would be the smallest yearly gain since 2009, according to a Bank of America Merrill Lynch index.

Goldman Forecast

A cooling job market is sapping household spending that makes up 70 percent of the economy, curbing sales at retailers such as Target Corp. (TGT) (TGT) and Macy’s Inc. Fed Bank of Kansas City President Esther George said yesterday the U.S. economy probably won’t grow much faster than 2 percent in 2012.

Goldman Sachs analysts led by Jan Hatzius cut their estimate for second-quarter economic growth to 1.1 percent from 1.3 percent, while Deutsche Bank chief U.S economist, Joseph LaVorgna, reduced his forecast to 1 percent from 1.4 percent.

“The sharp downward momentum in the economy” increases the probability of further Fed easing either in the form of another round of quantitative easing or other nonconventional measures, LaVorgna wrote in a note yesterday. “We need a couple of more weak employment reports, with figures near zero and with the unemployment rate increasing, for the Fed to undertake easing action.”

Fed’s George Says U.S. Growth May Not Exceed 2% in 2012

Federal Reserve Bank of Kansas City President Esther George said the U.S. economy probably won’t grow much faster than 2 percent this year, held back by caution among consumers and businesses.

The economy “is growing slowly for sure and some may characterize it as growing erratically,” George said today in a speech in Kansas City, Missouri. Growth will be “not much beyond 2 percent” in 2012, with some pickup in following years.

The Federal Open Market Committee voted last month to extend a program swapping short-term securities for long-term bonds in the Fed’s portfolio with the aim of bolstering a slowing U.S. economy and enlivening the job market. The Fed also said it would consider more stimulus if needed.

Policy makers face a “real challenge” in weighing whether more accommodative Fed policy will spur growth in employment, George said.

“We have provided a highly accommodative stance of monetary policy,” said George, who doesn’t have a vote on policy this year. “Will monetary policy put people back to work at this point? That is not clear to me.”

The U.S. recovery over the past three years has been marked by periods of solid growth followed by disappointing slowdowns, she said. “It looks like this summer’s slowdown will be no exception to that.”

Employment Weakness

Retail spending has waned, hurt by weakness in employment, the Kansas City Fed leader said. Businesses have raised their cash holdings and are reluctant to invest in part because of uncertainties including fiscal policy, the European debt crisis and the “regulatory landscape,” she said.

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