Bank Research Consensus Weekly 07-06-09

Published July 6th, 2009 - 01:48 GMT

A G8 meeting will take place in Italy next week (Wednesday to Friday), and interest in the FX market is centring on the Chinese delegation led by President Hu Jintao. In the past week the financial media have reported that China wants a discussion about the USD’s role as reserve currency. Understandably the Chinese are worried about what the US imbalances will mean for the USD in the long term, especially considering that the bulk of China’s FX reserves are invested in USD assets.

Niels-Henrik Bjørn Sørensen,                                                                         
Senior Analyst, Danske Bank



Weekly Bank Research Center 07-06-09



 

Global QE, Global Inflation

Stephen Roach, Head Economist, Morgan Stanley

Inflation complacency: With headline inflation gauges in negative territory in many countries and the global economy only just emerging from the ‘Great Recession', it may seem absurd or at least premature to worry about inflation risks. Indeed, most investors appear to be undaunted by inflation, a view that is also reflected in market-implied 10-year inflation expectations for the US and the euro area of less than 2%, which would be lower than actual inflation over the past decade. In our view, however, markets are too sanguine about longer-term inflation risks. It appears more likely to us that in the coming decade inflation will significantly exceed the levels seen over the past decade.

 

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G8 Meeting to Set Agenda for USD (Perhaps)

Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

A G8 meeting will take place in Italy next week (Wednesday to Friday), and interest in the FX market is centring on the Chinese delegation led by President Hu Jintao. In the past week the financial media have reported that China wants a discussion about the USD’s role as reserve currency. Understandably the Chinese are worried about what the US imbalances will mean for the USD in the long term, especially considering that the bulk of China’s FX reserves are invested in USD assets.

 

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Canada – Manufacturing Hammers April GDP

Steve Chan, Economist, TD Bank Financial Group

While the Canadian economy is definitely faring better than many others around the world, there is no question that it is still in a very weak state. This week we got the first glimpse of real production activity for the second quarter with the release of April GDP figures. The economy contracted 0.1% from March, marking the ninth consecutive month of decline. Compared to year-ago levels, the economy contracted by 3% – the quickest pace observed during the current downturn. While not off to a great start, we suspect that economic activity was even worse in May and June, resulting in an estimated annualized contraction of 2.2% for the quarter as a whole.

 

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Deja Vu – Same Old Inventory-Led Economic Downturn

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

Many assumptions about economic and financial market performance have been shattered in the 2 years since the global credit market crisis started. Not least amongst these assumptions was the view that ‘lean production’ methods – including manufacturers keeping stocks to a minimum and producing on demand to customer specification – would reduce the impact of the stock or inventory cycle on economic growth. But this economic downturn has, as always, been led by investment cut backs and falls in manufacturing output, driven by the inventory cycle. Chart a shows how sharp the fall in manufacturing output has been compared with the less pronounced reduction in the growth of volume retail sales, which has only just dropped into negative territory in annual terms.

 

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Compiled By: David Song, Currency Analyst and Nolan Mickey, DailyFX

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