Bank Research Consensus Weekly 07.05.10
Recalibrating the Rate Outlook
Richard Berner, James Caron & David Greenlaw, Global Economics Team, Morgan Stanley
Marking to market - again. It's time to mark our US yield forecast to market for the second time in as many months, as our belief that real yields would rise this year has not worked. Both real rates and inflation breakevens fell sharply as the European sovereign credit crisis triggered fears of contagion that might promote a US double-dip recession, slower global growth and deflation. Real 10-year yields measured in the TIPS market have declined to just over 1% - close to record lows - while 10-year inflation breakevens are near 1.8%, back to October 2009 levels.
FX: Dollar Suffers on Weak Data
Arne Lohmann Rasmussen, Cheif Analyst, Danske Bank
US data has disappointed over the past couple of weeks and double-dip fears have resurfaced. Consumer confidence has sky-dived, unemployment claims are up, manufacturing is slowing and the housing market is once again plummeting without the government incentives that boosted the market earlier this year.
For a long time, the market reaction to weak US numbers has been weaker risk appetite, which has had a tendency to push EUR/USD lower. However, this week, EUR/USD actually had a ‘textbook’ reaction to the negative US data surprises and EUR/USD has once again been pushed above 1.25 – a move that probably was reinforced by the many short euro positions that are currently in place in light of the European debt crisis.
It is also noteworthy that relative rates currently are working against the dollar. The twoyear swap spread between Euroland and the US has widened by 45bp in just a month to currently +44bp. However, we doubt that EUR/USD will continue to trade higher in the coming months. We believe the market will soon start to focus on the European debt problems once again. It is also likely that that the European numbers will also start to disappoint if the current weakness in the US economy continues.
United States - The Move Towards Slower Growth
Alistair Bentley, Research Analyst, TD Bank Financial Group
Financial markets continued to express unease about the strength and viability of the economic recovery this week. As of 1 pm on Friday, the S&P 500 index was down by 5.1% on the week, contributing to the 16.2% fall in stock valuations since the end of April 2010. Beyond the changes in headline grabbing equity markets, other key financial indicators have also showed a renewed sense of pessimism. The yield curve continued its recent flattening trend this week – largely the result of declining inflation expectations. TED spreads – an indicator of the perceived credit worthiness of banks in short-term funding markets – have not eased one iota following their rise during the peak of the European financial crisis. If the economic recovery is for real, then why are markets acting like the party is over?
At the onset of the recovery, many economists were caught off guard by the strength of growth as exports improved, stimulus measures kicked in and firms restocked depleted inventories. Admittedly, even our own forecasts were too pessimistic about the recovery’s initial strength. Against this backdrop, corporate profits rose and stocks posted an impressive rebound. Still, like most economists, we never switched our fundamental story that high levels of indebtedness in the public and private sector combined with continued stress in financial markets would hold growth to a tepid rate for the foreseeable future.
G10 FX - Q1 Currency Reserves: EUR Below 30% in EM. "Others" Gain
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets
The IMF earlier this week published its latest quarterly update of the composition of official foreign exchange reserves (Cofer data). Concentrating on the allocated reserves at the World level, the share of the USD fell marginally to 61.55% in Q1-10 from 62.17% in Q4-09. The share of EUR edged lower to 27.2% from 27.3%. Gains were noted for GBP (4.34% vs 4.29%), the JPY (3.14% vs 3.01%) and the Swiss Franc (0.12% vs 0.11%). The biggest increase, however, was recorded for the so-called ‘others’. These include G10 currencies like the NOK, SEK CAD, AUD and NZD, which saw their share climb to 3.65% from 3.12%. In dollar terms, this is equivalent to a rise of roughly $24bln.
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