Weekly Bank Research Center 10-12-09
Up but Not Tight
Spyros Andreopoulos, Joachim Fels & Manoj Pradhan, Global Economics Team, Morgan Stanley
Up down under: So, the Reserve Bank of Australia (RBA) became the first G10 central bank to hike rates in this cycle on Tuesday, following the example set by the Bank of Israel (BoI) in late August, which serves to underscore our view that, slowly but surely, the global monetary policy cycle is turning (see "As the Policy Cycle Turns...", The Global Monetary Analyst, September 30, 2009). But, interestingly, global markets didn't seem to attach much significance to this move, with risky assets continuing to rally. In fact, our updated liquidity metrics suggest that global excess liquidity has continued to grow until recently and looks set to rise further in the foreseeable future, even though more central banks look set to join the BoI and the RBA over the next several months. Still, the RBA's move offers an interesting lesson that is worth keeping in mind when thinking about other central banks' prospective behaviour in the upcoming tightening cycle: strongly rising asset prices may induce central banks to start lifting rates early from record-low emergency levels even if growth is still below-trend and inflation below-target.
UK: Production spoiled the fun Allan von Mehren, Chief Economist, Danske Bank Most UK data surprised positively. Halifax house prices showed yet another strong monthly increase providing further evidence that the housing market is indeed bottoming out. Service PMI beat estimates and rose further to 55.3 in September from 54.1 in August signalling clear expansion in the service sector. Car registrations rose 11.4% y/y up from 6.0% y/y in August. Finally, nationwide consumer confidence surprised to the upside rising to 71 in September from 65 in August. Normalizing the Credit Markets? John E. Silvia, Ph.D. Chief Economist, Wachovia
In recent months we have witnessed credit spread benchmarks such as the Ted spread and Libor rates dip below levels that existed prior to the Lehman collapse. In other areas we have seen both the Fed and the Bank of England purchase financial instruments such as Treasury bonds, corporate bonds and mortgage-backed and asset-backed securities.
Canada – Giving Thanks to no Jobless Recovery
Derek Burleton, Chief Economist, TD Bank Financial Group Canada’s employment report for September delivered some unexpected cheer this morning, uncovering a second straight healthy gain in net new positions ( +31,000) and a drop in the unemployment rate to 8.4%. It is a clear signal that job market conditions are turning for the better. Still, we continue to caution that the recovery path will probably be drawn out and could be quite painful.
Is the World Economic Recovery Faltering?
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets It would be nice and easy to believe that the road to economic recovery is now clear and straightforward after the financial market crash of 2007-2009. Equity markets have had one of the best quarters ever, corporate and government bond yields have fallen sharply and spreads, in cash and corporate bonds, are narrower than at any time since the crisis gathered momentum in 2008. Economic growth has resumed in Q2 or Q3 of 2009 for most economies after a year of declines. Housing markets (US, UK, Spain, Ireland) are seeing a flattening in activity after the sharp falls of the past year or some modest up-tick. And manufacturing output is recovering from its lows in most countries. But there are some signs that the pace of the recovery is losing momentum and faltering. We look at some of these issues in this Weekly Report, starting with recent trends in financial markets.
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Compiled By: Michael Wright, Daily FX Research
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