Bank Research Consensus Weekly 10-05-09

Published October 5th, 2009 - 07:10 GMT

While financial markets keep feasting on the global liquidity glut, there is a subtle but undeniable shift underway in the central bank community towards eyeing not only the end of easing, but the beginning of tightening. To be sure, our central bank watchers expect the Fed, the ECB and the Bank of England to start nudging rates higher only from around the middle of next year, and the Bank of Japan to even ease policy further.

Joachim Fels, Global Economics Team, Morgan Stanley



Weekly Bank Research Center 10-05-09




 

 

As the Policy Cycle Turns..

 

Joachim Fels, Global Economics Team, Morgan Stanley

While financial markets keep feasting on the global liquidity glut, there is a subtle but undeniable shift underway in the central bank community towards eyeing not only the end of easing, but the beginning of tightening. To be sure, our central bank watchers expect the Fed, the ECB and the Bank of England to start nudging rates higher only from around the middle of next year, and the Bank of Japan to even ease policy further. However, several other G10 and emerging market central banks look set to tighten policy over the next 3-6 months, and it appears likely that the rhetoric from those who will remain on hold over that period becomes gradually more hawkish (less dovish). This combination of action by some and talk by others may well challenge the prevailing post-Jackson Hole and post-G20 consensus that rates in the major economies will remain low for longer.

 

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Euro Weakens - Relative Rates Again Important

Kasper Kirkegaard, Chief Economist, Danske Bank

A relatively volatile week on the FX market saw major fluctuations in most of the main crosses. Implied volatility on short options (a measure of the scale of expected fluctuations) is generally trading higher, and has risen on the yen and New Zealand dollar in particular. The euro also had a tough week, weakening against all G10 currencies, but the Swedish krona and the Swiss franc – helped by possible intervention by the SNB (see Switzerland). The euro fared particularly badly against the dollar currencies – EUR/USD has fallen from 1.48 to test 1.45 – but also the Asian currencies appreciated, with the South Korean won and the Philippine pesos considerably higher. Finally, note the turnaround in the rouble, which ended September almost 4% stronger against the euro.

 

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Economic Recovery Accompanies Credit Improvements

 

 

John E. Silvia, Ph.D. Chief Economist, Wachovia

 

As we enter the second quarter of the economic expansion, the recovery will be accompanied by continued increases in issuance and decreases in credit spreads as they both reflect the improvement in corporate profits. Investment grade corporate spreads have now returned to pre-crisis levels. Since May, interest spreads on both high grade and high yield bonds have declined while issuance has improved. Historically, a decline in interest rate spreads has been a leading indicator of an economic recovery and this pattern has reasserted itself. Even AAA CMBS spreads have declined in recent months as the Fed’s TALF program has taken hold for high-quality, asset-backed securities.

 

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Canada - Reflecting as Autumn Winds Blow

 

Diana Petramala, Chief Economist, TD Bank Financial Group

With Canada’s economy having turned the corner in June, markets are stuggling to assess how recovery will unfold and how monetary stimulus will be unwound. Our view is that the recovery will be sluggish compared to the 1983 rebound and only modestly better than that following the 1990s recession. We project growth of 2.6% to emerge in Q3/2009 and a pace of 2.4% to be sustained during 2010. Although potential growth has slowed, the forecast pace of real growth implies Canada’s “output gap” (i.e. excess capacity) will narrow rather slowly, only closing by late 2012.

 

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Is The Fall in Sterling Good or Bad News?

 

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

Judging by the fevered headlines surrounding the fall in the UK’s exchange rate over the past couple of weeks, one might imagine that sterling was on the verge of a currency crisis. We argue that it is not. We examine the reasons for the recent decline in the UK currency and assess its prospects going forward. Our conclusion is that, far from being a cause for concern, the depreciation is not only desirable, but essential if the UK is to undergo a successful rebalancing away from domestic demand towards net exports over the coming years. Indeed, judging by the comments made by Bank of England Governor Mervyn King last week, and a recent article published in its latest Quarterly Bulletin, this view appears to be shared by the Bank of England.

 

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Compiled By: David Song, Currency Analyst and Michael Wright

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