Some themes are like U-boats. They linger beneath the surface most of time, but when they emerge occasionally, they provoke much fear and can cause serious damage. One such theme is the potential break-up of the euro, which has become popular again recently with the deepening of the financial turmoil. Stephen Roach, Head Economist, Morgan Stanley
Euro Wreckage? A Remix
Stephen Roach, Head Economist, Morgan Stanley
Some themes are like U-boats. They linger beneath the surface most of time, but when they emerge occasionally, they provoke much fear and can cause serious damage. One such theme is the potential break-up of the euro, which has become popular again recently with the deepening of the financial turmoil. Euro break-up was first widely discussed ahead of the introduction of the euro ten years ago, when commentators such as Harvard economist Martin Feldstein argued that the single currency might even lead to civil war in Europe. When that didn’t happen immediately and the euro introduction went smoothly, the theme submerged, only to make a comeback in 2004/05 when fiscal deficits rose and the fiscal stability pact was broken and had to be rewritten. Then as now, sovereign yield spreads between EMU member states widened and the euro weakened as markets were pricing in a rising probability of some sort of break-up. Full Story ECB Cuts With Prospect of More to Come Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank As expected, the ECB rate-setting meeting resulted in a 50bp cut in key rates to 3.25%. The ECB also signalled that it is willing to cut rates further as early as in December. ECB President Trichet mentioned, for instance, that a 75bp rate cut had been discussed, but that the bank was unanimous in its decision to "settle for" 50bp. Given this - and the very weak activity data for Euroland recently - we expect the ECB to cut rates by another 50bp in December and 25bp in both March and June 2009. This means that the ECB will likely cut rates faster and more aggressively than anticipated in our previous forecasts of unchanged rates in December and 25bp rate cuts in January, March and June 2009. Among the past week.s very weak economic data for Euroland we find final composite PMI, which showed a decline from 46.9 in September to 43.6. Moreover, new orders in Germany have fallen sharply by 8% m/m, partly because orders for export markets shed a massive 11.4% m/m. This bodes ill for the German and hence the European economy. Full Story Recession Fears Drive Fed & Credit E. Silvia, Ph.D. Chief Economist, Wachovia
Full Story
ECB Cuts With Prospect of More to Come
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
As expected, the ECB rate-setting meeting resulted in a 50bp cut in key rates to 3.25%. The ECB also signalled that it is willing to cut rates further as early as in December. ECB President Trichet mentioned, for instance, that a 75bp rate cut had been discussed, but that the bank was unanimous in its decision to "settle for" 50bp. Given this - and the very weak activity data for Euroland recently - we expect the ECB to cut rates by another 50bp in December and 25bp in both March and June 2009. This means that the ECB will likely cut rates faster and more aggressively than anticipated in our previous forecasts of unchanged rates in December and 25bp rate cuts in January, March and June 2009. Among the past week.s very weak economic data for Euroland we find final composite PMI, which showed a decline from 46.9 in September to 43.6. Moreover, new orders in Germany have fallen sharply by 8% m/m, partly because orders for export markets shed a massive 11.4% m/m. This bodes ill for the German and hence the European economy.
Recession Fears Drive Fed & Credit
E. Silvia, Ph.D. Chief Economist, Wachovia
Recession concerns were reinforced this week by economic weakness in jobs, factory orders and manufacturing surveys. This information will lead to another Fed ease but also an increased aversion to risk-taking in the private markets. Recession, which appears to be underway, will be the driving factor that will keep the Fed providing liquidity until mid-spring of next year. This suggests that short-term interest rates will remain low for an extended period of time. At this point we expect a 25 basis point ease in December with a further bias to ease next year. Inflation concerns are just not a barrier to further Fed ease. Through its liquidity facilities we expect the Fed to maintain ample credit to banks. At the short end of the yield curve we have seen an improvement in lower private market rates such as LIBOR. This suggests credit availability is coming back into the market, at least for interbank lending, and that the worse of the credit problem may have passed—at least at the short-end of the curve. However, the credit channel from banks to non-bank borrowers is still dry as banks remain highly risk-averse given the decline in final sales and absolute drop-off in profits. In the short-run banks are improving their balance sheet but lending is not yet ready for prime time.
Brother Can You Spare a Job?
Steve Chan, Economist, TD Bank Financial Group
If there is one statistic that President-elect Obama will certainly have in mind as he prepares his transition team, it is the state of U.S. employment. He can’t be happy with what he’s seeing. The U.S. economy has shed jobs every month this year and the numbers have only worsened as the year has gone on. Not only were there 240,000 jobs lost in the month of October but revisions to the previous two months added another 179,000 job losses to the ledger, moving total losses so far this year to 1.2 million. Year-todate there are only 139,000 fewer losses so far this year than in the same period in 2001 and the worst is yet to come. Job losses, which started out in manufacturing and construction at the start of the year, have now moved to the service sector. While service sector job growth was positive over the first seven months of this year (offsetting some the substantial weakness in manufacturing and construction), they slipped into negative territory in August. Since then, job losses in services have outpaced the goods producing sector and have contributed over 56% of total job losses in the past three months.
Will This UK Recession Be As Bad As Last Time?
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
UK economy contracts for the first time since 1992. The first decline in UK gdp since 1992 means that the economy is heading for recession. Growth contracted by 0.5% in Q3, after being flat in Q2. On balance, it is likely that growth will fall again in Q4 though not by as much as in Q3, which saw a bigger fall than expected as manufacturing output dropped across the board. The global and UK economic backdrop has worsened significantly in the last 3 months, with the capital injections, government guarantees and cuts in official interest rates doing little to calm financial markets, though some of the panic in equity markets seems to have abated. Such has been the loss of confidence in financial markets that all global leveraged positions are suspect, for countries, firms or industrial sectors. UK growth in Q3 was especially hit hard by the sharp rise in price inflation, weakening in wage inflation and the increases in petrol, gas and electricity charges that cut real household incomes quite sharply.
Other Pre-screened Independent Contributors
J-Chart
J-Chart is an innovative charting and bias-neutral market analysis tool. Based on its proprietary theoretical concept and display of market price action, J-Chart provides a much clearer and unique insight into the market than conventional charting methods. This innovative charting and market analysis tool is designed to visualize market price action that constructs unique price patterns called "Equilibriums". Based on its "non-fixed time frame" concept and "Kinetic Equilibrium" application, J-Chart users are able to forecast markets' future movements with high accuracy.
J-Chart Weekly Newsletter