The BoE had been reluctant to cut rates quickly over the last year even as the Federal Reserve was quick to do so. The rationale for not rushing to bring down the lending rate drastically had to do with the BoE’s mandate to keep inflation near two percent, when last fall year-over-year inflation was over five percent. But inflation -- at a year-over-year rate of 3.0 percent in January -- poses less of a threat.
E. Silvia, Ph.D. Chief Economist, Wachovia
Weekly Bank Research Center 03-09-09
Quantitative Easing: What Is it and How Might it Work?
Stephen Roach, Head Economist, Morgan Stanley
The MPC has clearly signalled that further policy easing is very likely. Further easing will very likely come in the form of 'quantitative easing'. It now looks very likely that the BoE will soon start buying gilts and other assets with the stated aim of increasing the money supply. We analyse what quantitative easing is, how it might be done and whether and how it might work. While it is far from clear that quantitative easing (QE) will achieve very much in the current environment, we think it is worth a try. The degree to which it is effective will crucially depend on which assets are purchased. Here, there is likely to be a trade-off: the more like cash the assets purchased are (in terms of liquidity, maturity and credit risk), the less likely quantitative easing is to have a substantial effect. But the less cash-like the assets purchased are, the more risk of loss the central bank (and ultimately the government) will be taking.
USD Rebound Not Yet Over
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The USD has made a strong start to 2009 and has been the best-performing G10 currency to date. There are several reasons for this, including movements in relative interest rates and equities, which have both favoured the USD, and lower oil prices, which are increasingly helping energy-intensive American households back onto their feet. There is also still an overhang of USD scarcity in financial markets from last year, which has prompted the Federal Reserve to extend its swap arrangements with other central banks until October. This latter factor is crucial to an understanding of why the USD is finding natural support in the market. We (and others, including the BIS) also think this is one of the main reasons why the USD has bounced back so strongly after being on its knees last summer.
Bank of England Taking a Cue from the FOMC
E. Silvia, Ph.D. Chief Economist, Wachovia
The BoE had been reluctant to cut rates quickly over the last year even as the Federal Reserve was quick to do so. The rationale for not rushing to bring down the lending rate drastically had to do with the BoE’s mandate to keep inflation near two percent, when last fall year-over-year inflation was over five percent. But inflation -- at a year-over-year rate of 3.0 percent in January -- poses less of a threat. With just about every major economy around the world mired in recession, there is less danger of runaway inflation taking hold. In addition to the problem of slowing growth abroad, there were signs this week that domestic demand in the United Kingdom was falling apart as well. The purchasing managers' indexes for both manufacturing and the service sector remained in contraction territory in February though the survey for the service sector has begun to show tentative signs of recovery. BoE Governor Mervin King wrote to the Chancellor of the Exchequer noting that in "these highly uncertain times, there are merits to stimulating the economy through a variety of different channels."
Car-Pocalypse and Beyond in the U.S.
Steve Chan, Economist, TD Bank Financial Group
Factory payrolls dropped by 168,000, which was less than in the prior two months. But the 'car-pocalypse' rolls on, and job losses were very broadly based. As February U.S. car sales plunged 41% year-over-year, and those of the Detroit 3 (D3) at only half the levels a year prior, excess capacity remains significant and more layoffs are in the data pipeline. Only utilities, education, health, and government services created jobs in February, and a marginal 36,000 at that. Meanwhile, the unemployment rate increased from 7.6% to 8.1%, which brings it to its highest level since December 1983.
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