Bank Research Consensus Weekly 05.10.10
EM Tightening: Think Locally, Rank Globally
Minoj Pradhan, Global Economics Team, Morgan Stanley
EM central banks are clearly poised to reverse the substantial monetary stimulus they had provided to see off the Great Recession. Drawing on the expertise of our EM teams, we cluster central banks according to how much they are expected to tighten policy - and not just by looking at policy rates. In addition, we introduce a ranking to capture the risk of central banks acting aggressively over the next 6-12 months. Three observations stand out. First, AXJ economies, for all their economic outperformance, are conspicuous by their absence from the top quintile of the tightening and risk rankings. The notable exception is the RBI, fighting an apparent inflation problem, which just misses out on a slot in the top quintile for tightening but is in the top quintile as far as the risk of aggressive action is concerned. On the other hand, fellow economic AXJ powerhouses - the PBoC and the Bank of Korea - look decidedly less aggressive. Second, the stronger performers in the CEEMEA and LatAm regions have a strong presence in the top two quintiles for policy tightening and the risk of aggressive action, taking up seven of the top ten spots in the former and seven out of eight in the latter. Finally, an interesting observation unrelated to rankings is the widely different role that policy rates play in different countries. This suggests to us that simply comparing policy rate paths across the EM world is a less desirable strategy if one wants to understand and compare the stance of monetary policy.
FX: Euro Sell-Off Accelerating
Kasper Kirkegaard, Senior Analyst, Danske Bank
Rescue package and ECB efforts fail to halt euro slide
Neither the Greek rescue package nor the ECB’s decision to continue lending against Greek government bonds, irrespective of the credit rating of the Greek government, were enough to halt the strong sell-off in the euro that has taken USD/DKK above 5.90 – the highest level since the financial markets turned in March 2009. The massive, if shortlived, fall experienced by US stock exchanges Thursday evening added extra momentum to the euro sell-off and clearly demonstrated that the dollar together with the yen and the Swiss franc still serve as safe havens in the FX market. In contrast, the euro has lost some of its safe-haven properties in the current environment, as it is largely European debt problems that are weighing down the market.
Scandi safe-haven status debunked
As long as global risk appetite remained buoyant, the Scandinavian currencies were largely untouched by Europe’s debt woes. However, Thursday’s trade revealed that the Scandies – despite being supported by healthy balances (relatively small budget deficits and low levels of public debt) – do not live up to their safe-haven moniker once risk appetite evaporates. So while we basically continue to see potential in both the Norwegian and, especially, the Swedish kroner, uncertainty is high and both currencies
U.S. Review: Strange Days
John E. Silvia, Ph.D. Chief Economist, Wachovia
Strange days have found us
Strange days have tracked us down
The Doors, Strange Days, Elektra, 1967
Thursday’s wild swing in the stock market and the ongoing saga over the debt crisis in Greece and other European nations overshadowed this week’s economic news. Most of the data on the U.S. economy continue to show a broadening economic recovery that should produce solid but relatively modest job gains. Reports from the manufacturing sector, such as the ISM manufacturing survey and this morning’s manufacturing employment data, tend to show more strength than reports on the services sector, while most data on private construction activity continue to show a great deal of weakness.
Much of the discussion on Thursday’s sharp midafternoon stock market selloff is focusing on the role computer trading exchanges played in generating trades at extraordinary low prices. While these trades greatly magnified the extent of the swing in the stock market, they are not the root cause. The ongoing worries about the Greek debt crisis, the violent protest associated with it and worries about the potential spillover into other economies led to a substantial reduction in risk preferences. As investors became more risk-averse, liquidity dried up in the stock market, forcing some Designated Market Makers to temporarily halt trading in a handful of stocks. Some of those stocks then traded on electronic exchanges, where the lack of liquidity led to wacky pricing. While there is a real need to fix this glitch, the real problem is what led to the lack of liquidity in the first place—the Greek debt crisis and the ongoing difficulty and growing risks in dealing with it.
United States - Second Quarter Off to a Good Start
Pascal Gauthier, Economist, TD Bank Financial Group
After the U.S. economy grew by 3.2% in Q1, this week’s first batch of comprehensive economic data for April served as a good test as to whether or not the recovery would gainfurther traction in Q2. Real GDP growth is expected to climb near 4% in Q2, and this week’s data indeed provided more confidence that this expectation would materialize. Productivity surprised to the upside with a 3.6% gain in Q1, easing from the torrid 7.2% average pace set in the previous three quarters. Meanwhile, unit labor costs (-1.7% Q/Q, -3.7% Y/Y) dropped for a third consecutive quarter, entrenching disinflation as the trend and providing no rationale for the Fed to pull the trigger on rates anytime soon.
The nonmanufacturing ISM index held at 55.4 in April – its highest level in four years – as sub-indexes traded off gains and drops. Staying well above the 50 expansion threshold, it suggests continued expansion at a good clip on the services side of the economy. Meanwhile, the manufacturing ISM index climbed past 60 to reach 60.4 (from 59.6 in March). Over the course of its history which dates back to 1948, this index has managed to hold above 60 only 15% of the time. While manufacturing and exports should still lead the recovery in the months ahead, further incremental gains will be harder to come by, especially if the recent appreciation of the dollar against most major currencies is sustained. The composition of strength in this key index was also favorable, with the new orders, production, and employment sub-indexes all recording strong bounces. Particularly encouraging was the resumption of the nearly uninterrupted climb in the employment sub-index since Q1/2009 and a fourth consecutive reading well clear of 50.
UK Economy Faces Reality of a Hung Parliament
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets
The UK has just had one of the most hotlycontested general elections in living memory. It has resulted in a hung Parliament as expected. This means that no party can form a government on its own. So a coalition or minority government is now a certainty. There is also a high risk that this sort of government will not last the full fiveyear term. With many permutations of minority or coalition government possible, we will focus on the task facing the next government. However, it is clear from recent financial market volatility directly related to the Greek debt crisis that there needs to be an urgent effort to give reassurance on how the UK is going the meet its public sector debt challenge.
We believe that there is enough agreement on the need to tackle the budget deficit between the parties for some sort of plan of action to be announced in the next week or so. Of course, the quicker this occurs, the better it is for equity, foreign exchange and interest rate markets. Hence, four key themes will dominate the next parliament: a) cutting the deficit and debt; b) an era of debt repayment rather than debt accumulation; c) meeting the challenge of where growth will come from – rebalancing; d) the unwinding of loose monetary policy and its implications for FX and interest rates.
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