Bank Research Consensus Weekly 03.29.10
Trying Times Thanks to the Trilemma
Manoj Pradhan, Global Economics Team, Morgan Stanley
The Reserve Bank of India's inter-meeting policy hike on Friday didn't come a day too soon, if the reaction of financial markets was anything to go by. Stocks reacted positively to the start of the hiking cycle, and so did the currency. While the former reaction will have encouraged policymakers to fight inflation aggressively, we think the reaction of the currency will probably dampen their ability to do so as they will want to avoid excessive exchange rate appreciation. This dilemma, rather trilemma, affects many central banks, particularly in the fast-growing Asia ex-Japan region, some of whom work with ‘hard' or ‘soft' pegged exchange rates. The growing economies and surging markets in these regions have already attracted large capital flows and are likely to continue to do so as long as central banks in the developed economies keep the AAA (ample, abundant and augmenting) liquidity regime intact. We believe that this will be the case for 2010 and even most, if not all, of 2011. The trilemma is likely to intensify going forward, restraining the ability of policymakers to control overheating and inflation in the region.
FX: EUR Under Continued Pressure, NOK Let Down by Norges Bank
John Hydeskov, Chief Analyst, Danske Bank
EUR came under pressure again during the week. The combination of falling European yields, unclear messages about how the strong Euroland countries will help Greece to solve its debt problems, and a further downgrade of Portugal's credit rating dragged EUR down, especially against USD.
We reckon that EUR is vulnerable in the short term and could fall further. However, it might help that European leaders finally seem to be finding common ground on how to help Greece, with the result that assistance from the IMF has been put on standby. We have long expected this to be the solution, even though the IMF is there mainly for weak developing countries running into economic problems, while an industrialised Western nation (and member of what is, on paper, a strong currency union) should be able to solve its own problems or at least get help from its friends on favourable terms.
Strange Days in the Credit Markets
John E. Silvia, Ph.D. Chief Economist, Wachovia
The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.
United States - Housing Market Losing Steam
James Marple, Economist, TD Bank Financial Group
While debt concerns out of Europe rattled global stock markets and sent the U.S. dollar up 1.4% against the Euro, data on the U.S. housing sector and the final estimate of GDP growth in the fourth quarter of 2009 offered an opportunity to check up on a number of pivotal elements of the U.S. economic recovery.
It almost seems blasé to talk about challenges facing the U.S. housing market. After three years down in the dumps, a recovery seems long overdue. Unfortunately, as new and existing home sales for February illustrated, the good times aren’t rolling in just yet. New single-family home sales fell by 2.2%, while existing home sales were down 0.6%. After a stimulus-fueled burst in late 2009, new and existing sales have fallen in each of the last three months. As a result, the balance between supply and demand in the housing market has once again moved towards more slack. At the current sales rate, months’ supply of unsold new homes has risen to 9.2 months, its highest level since May 2009, while existing homes months supply is up to 8.6, its highest level since August.
A Budget that Did No Harm?
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets
It is sometimes said that the first rule for Budgets should be: ‘do no harm’. Judging by the reaction of financial markets immediately after the 2010 Budget this maxim seems to have been observed, with fairly little movement in bonds, equities, cash or the currency. However, it is far too soon to say whether this was a good Budget or not in the medium term, as this depends very much on how economic and financial events unfold relative to the assumptions in the Budget. What we do know is that, relative to the Pre- Budget Report (PBR) in 2009, there are few new announcements in the Budget at the macro level.
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Compiled By: Michael Wright, Daily FX Research
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