Bank Research Consensus Weekly 03.22.10
Risks in the Policy Mix
Joachim Fels & Major Pradhan, Global Economics Team, Morgan Stanley
Debt is rising, the global economy is recovering and inflation risks will play a crucial role in determining when major central banks start their exit from their ultra-expansionary stance. On these points, there is broad agreement all round. However, the timing of fiscal and monetary policy tightening to deal with these developments is a bit more contentious, and it is here that our view differs from that of markets and many of our clients. First, while most clients seem to be gearing up for a significant fiscal tightening in 2010-11, we see little sign of such restraint going by the forecasts from our global economics team (see "What Fiscal Tightening?" Global Forecast Snapshots, March 10, 2010). Second, we expect central banks to start tightening policy sooner than markets expect, acting as a counterbalance for weaker fiscal restraint. Finally, we do not see the recovery or the policy tightening process as a linear one. Specifically, we see more downside risks to growth in 2011 than in 2010, and believe that these downside risks will keep central banks from tightening policy aggressively, keeping the door open for inflationary risks to build up.
FX: Weaker Dollar, Stronger CHF
Arne Lohmann Rasmussen, Chief Analyst, Danske Bank
We adjusted our EUR/CHF forecast lower in the latest issue of FX Forecast Update and we therefore keep our recommendation of being very careful using the franc as a funding currency.
In the statement released after the SNB meeting last week, the Swiss central bank reiterated that it will counteract any excessive franc appreciation. The SNB has however accepted that EUR/CHF has continued to drift lower and over the past couple of days the downward pressure has intensified and EUR/CHF has dropped below 1.44. The appreciation pressure accelerated on Thursday as SNB board member Danthine said that Swiss firms and consumers should be prepared for rising borrowing costs and exchange rates set freely in the market.
Continued Economic Recovery, Low Inflation Remain Consistent with the Annual Outlook
John E. Silvia, Ph.D. Chief Economist, Wachovia
In our 2010 annual outlook we forecasted a growth rate of 2 percent plus for 2010 and overall consumer inflation of around 2 percent as well. This week’s economic releases support that outlook.
On the real economy side, three economic releases this week—industrial production, the Philadelphia Fed index and the leading economic index—all support the view of continued economic growth. Over the last three months, industrial production has grown six percent plus with continued solid gains in information processing equipment. Cold weather—isn’t it always cold in February?—pushed up utility output for a third straight month. Taking a different slice of the data, consumer goods and business equipment have been up over the last three months while construction supplies continue to decline.
United States - Inflation Slacking Off
James Marple, Economist, TD Bank Financial Group
The economic calendar was filled this week with a plethora of data on the state of the U.S. economy. The impact of inclement weather was evident in several areas including industrial production, which flattened in February after strong gains in the past several months and U.S. housing starts, which fell from January levels. As is perennially the case in economics, attention was focused primarily on inflation and monetary policy. This week contained both a meeting of the Federal Open Market Committee and the release of the consumer price index. The Fed’s statement came first and contained few surprises. While the discussion of economic conditions reflected a slightly more positive tone than their past statement, the meat of the statement: namely, the wording around inflation and the now infamous “extended period” phrase both remained unchanged. With the federal funds rate at its effective lower bound, interpreting monetary policy has now, more than ever, become a matter of reading between the lines.
UK Budget Deficit Set to Undershoot Chancellor’s Forecast
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets
Recent UK economic data have painted a mixed picture, with the sharp fall in manufacturing production and exports in January contradicted by strong improvements in some of the business surveys – notably, the latest manufacturing and services sector PMIs. This week’s reports should hopefully bring a little more clarity, with the latest labour market, money supply and public sector borrowing data all due. The latter will attract particular attention ahead of the 24 March Budget. Public sector net borrowing is forecast to have jumped to £13.5bn in February, taking total net borrowing in the fiscal year to date to £136bn. With only the March figures to come, there is a good chance the FY09-10 budget deficit will undershoot the Chancellor’s Pre-Budget projection of £178bn by around £15bn. While not much in the scheme of things, it should provide the Chancellor with some welcome wiggle room ahead of the General Election.
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