Bank Research Consensus Weekly 06-01-09

Published June 1st, 2009 - 01:54 GMT

American consumers have begun what looks like a long process of deleveraging their balance sheets and rebuilding saving, aimed at restoring a more sustainable balance between household debt and consumers' ability to carry it.

Stephen Roach, Head Economist, Morgan Stanley

Weekly Bank Research Center 06-01-09


Deleveraging the American Consumer

Stephen Roach, Head Economist, Morgan Stanley

American consumers have begun what looks like a long process of deleveraging their balance sheets and rebuilding saving, aimed at restoring a more sustainable balance between household debt and consumers' ability to carry it. One measure of sustainability is the debt service ratio - household payments of interest and principal on debt in relation to disposable income. By that metric, courtesy in part of lower interest rates and our expectations for a recovery in income, consumers are already about one-quarter of the way through the process. Of course, consumers' ability to carry and service debt depends on current and expected income and wealth - both financial and tangible, largely in housing. Indeed, the unprecedented plunge in employment, and thus income and wealth, triggered the consumer retrenchment that emerged last summer. Hopes are now high for a recovery in income, further progress in trimming debt service, and thus for improvement in consumer spending.


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Less Euro-Negative Factors, Fewer Dollar-Positive Factors

Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

In the short run, it seems like EUR/USD has risen too far and too fast. Even though oil prices have risen sharply (despite high inventories and the fact that much of the rise is driven by speculation that emerging Asia will show demand soon) and global equity prices have continued higher, albeit at a somewhat slower pace, the rise in EUR/USD cannot fully be explained by movements in other asset classes. Relative interest rates continue to favour the dollar relative to the euro, but the correlation between rates and FX is currently low. Important to note though is that USD has been surrounded by negative sentiment due to concerns on the US debt situation that was questioned by markets after S&P put UK’s debt on negative outlook on 21 May. We do not think the US on a negative credit outlook will take the dollar much lower as the current pricing has already taken that into account. The euro-negative factors such as Euroland’s exposure to Central and Eastern European countries in terms of bank lending and exports have not been priced yet. We expect therefore to see a downward correction in EUR/USD in the short run.


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Loonie Back in Full Flight

Steve Chan, Economist, TD Bank Financial Group

The Canadian dollar (CAD), up past 0.91 USD as of writing, has certainly been on a tear of late. Remember when it was at 0.77 USD just three months ago? Is this 2007 all over again? Not quite. The drivers behind this latest move differ from those that drove the CAD above parity against the USD in mid-2007. First off, Canada is not alone in this move, far from it. It has also not recorded the largest appreciation against the USD by any means, but rather lies in the middle of a pack in this regard, as the accompanying chart highlights. Most major currencies have appreciated substantially against the USD in the last three months. Sure enough, oil prices have rallied and contributed to lifting the CAD, but broader commodity prices that would be needed to ground the currency move in fundamentals, in particular natural gas, have moved mostly sideways during the same period.


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Benchmark Bond Yields Hit Six Month Highs

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

US 10-year treasury yields hit a 6-month high of 3.75%, despite decent demand in the auctions and talk of further asset purchases by the Fed. Five-year swaps surpassed 3% for the first time since November. Instead, increasing concerns about the rising fiscal deficit weighed on treasuries, despite Moody's affirmation that the country's AAA rating is stable. Reports of MBS-related selling also exacerbated the rise in yields. Further out on the curve, 30-year treasury yields hit a 9-month high of 4.65%, raising concerns about the impact of higher mortgage rates on any potential recovery in the housing market, while 30-year swap spreads were the least negative for four months.


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