We have been bullish on the dollar since last December, and started warning about severe stress in the EM currencies in May. The dollar’s recent rally has exceeded our expectations and we trust that the market is telling us that the forces we had identified as assisting the dollar may be more powerful than we had thought. We are thus revising up our USD forecasts to reflect this realisation. Stephen Roach, Head Economist, Morgan Stanley
An Even Bigger and Broader Dollar Smile
Stephen Roach, Head Economist, Morgan Stanley
We have been bullish on the dollar since last December, and started warning about severe stress in the EM currencies in May. The dollar’s recent rally has exceeded our expectations and we trust that the market is telling us that the forces we had identified as assisting the dollar may be more powerful than we had thought. We are thus revising up our USD forecasts to reflect this realisation. We believe that investors will likely start to assume that the global economy will head into a deeper recession than we had envisaged – probably something as severe as the one we saw in 1982, when the world grew by only 1%. As a result, cross-border risk-reduction is likely to continue. We believe that this trend of general deleveraging will be very powerful for much of the rest of the year and will be positive for the dollar. Emerging markets (EM) economies will likely be severely stressed, as will their currencies, with negative feedback effects on the developed world, particularly Euroland and the UK. All of these pressures will, in our view, force the dollar even stronger – the 'Dollar Smile' idea. Full Story BoE to Cut Aggressively Over the Coming Year Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank The UK economy continues to be under pressure from all sides. Companies face a rapid decline in demand on all sides. On the domestic market, private consumption is slowing substantially as households face headwinds from rising unemployment, falling house prices, falling equity prices and a severe tightening of lending standards. During the past week we saw house price data from Nationwide down 14.6% y/y, while the retail survey Distributive Trades Report stayed at a very subdued level. External demand is also slowing sharply, as Euroland has gone into recession and export markets in the US and Central and Eastern Europe are also suffering. Falling demand growth is curbing investment spending as well as putting a further dampener on growth. The UK economy will likely be in recession well into 2009 with the risk of it becoming longer and deeper. Inflation is still very high at 5.2%, but the underlying drivers of inflation have turned and are now pointing to a very steep drop in inflation in 2009. Commodity prices have fallen very fast and the ailing economy will reduce pricing power and wage demands. Full Story There is No Joy in Mudville E. Silvia, Ph.D. Chief Economist, Wachovia
Full Story
BoE to Cut Aggressively Over the Coming Year
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The UK economy continues to be under pressure from all sides. Companies face a rapid decline in demand on all sides. On the domestic market, private consumption is slowing substantially as households face headwinds from rising unemployment, falling house prices, falling equity prices and a severe tightening of lending standards. During the past week we saw house price data from Nationwide down 14.6% y/y, while the retail survey Distributive Trades Report stayed at a very subdued level. External demand is also slowing sharply, as Euroland has gone into recession and export markets in the US and Central and Eastern Europe are also suffering. Falling demand growth is curbing investment spending as well as putting a further dampener on growth. The UK economy will likely be in recession well into 2009 with the risk of it becoming longer and deeper. Inflation is still very high at 5.2%, but the underlying drivers of inflation have turned and are now pointing to a very steep drop in inflation in 2009. Commodity prices have fallen very fast and the ailing economy will reduce pricing power and wage demands.
There is No Joy in Mudville
E. Silvia, Ph.D. Chief Economist, Wachovia
The recession will likely be along the lines of the 1973/75 downturn. That recession was relatively long and deep. Real GDP declined by 3.1 percent from peak to trough and the downturn lasted for 18 months. By contrast, the past two recessions were relatively short and shallow, with real GDP declining at most 1.3 percent and the downturn lasting for nine months each. Our outlook calls for three quarters of declines in real GDP but close to two years of declines in domestic demand. The weakest period for the economy is likely to be the fourth quarter of this year and the early part of 2009. The unemployment rate, however, which has already risen 1.4 percent since its cycle trough, will likely rise throughout the next year and peak at around 8.0 percent in early 2010.
U.S. Economy Continues to Show Weakness
Steve Chan, Economist, TD Bank Financial Group
Another week, another roller coaster ride in the stock markets. But this time, there was much more green on the boards, with all North American markets (barring a sharp drop this afternoon) finishing the week well above last Friday’s close. As of noon today, the Dow, NASDAQ and S&P 500 were up 9%, and the TSX was up 5%. But even with these recent advances, market confidence is still quite fragile. And the string of weak U.S. economic data this week did nothing to improve it. Despite most signs pointing to a recession, the U.S. economy had managed to post real GDP growth in the first half of the year. However, the U.S. economy slipped into the red in the third quarter. Indeed, real GDP fell by an annualized 0.3% Q/Q, which was a little better than expected, but still represented a contraction. Consumption was the biggest drag on economic growth, falling by a massive 3.1% Q/Q. This is the first decline since 1991 and the largest quarterly slide since the second quarter of 1980. And with personal income and expenditure data released this morning showing a 0.3% M/M decline in consumer spending in September – the first monthly drop in this indicator since September of 2006 – the U.S. entered the fourth quarter with a very weak handoff.
UK Data Will Keep Focus on Recession Risk
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
The preliminary estimate last week showed that the UK economy contracted by 0.5% in Q3 compared with the previous quarter. This represents the first contraction in output since Q2 1992 and the biggest quarterly fall since Q4 1990. The market consensus view was for a smaller decline of 0.2%. Looking ahead, a further modest fall in Q4 is possible, though so is flat growth. Should the Q4 outcome be negative (published in January), then the UK economy will be in technical recession. Given the latest figures, our weaker case scenario for growth (as published earlier in the year), where the UK economy contracts by up to 1% in 2009, now seems more likely. What does this mean for UK base rates? We forecast a base rate cut of one percentage point to 3.5% - probably a 0.5% cut at the BoE's 6th November meeting and an additional 0.5% cut - which may take the form of another round of co-ordinated central bank cuts- before year end. Confirmation of a contraction in Q3 US GDP may provide further justification for the Fed to cut its funding rate by up to 0.5% to 1% at this week's meeting. Moreover, should the German IFO survey and EC confidence indices for October weaken further and the flash CPI October inflation figure fall to around 3.4% as expected, the chance of up to a 0.5% cut in rates to 3.25% by the ECB will significantly increase. The Norwegian central bank is expected to cut interest rates by 0.5% to 4.75% on Wednesday.
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