Bank Research Consensus Weekly 02.21.11
Inventories Primed for Restocking
David Cho, Global Economics Team, Morgan Stanley
An inventory trifecta. Despite pulling back sharply to close out 2010, US firms appear primed to restock inventory levels again. In our view, a confluence of three factors will encourage businesses to let inventories build in relation to sales over the course of 2011. First, buoyed by the fiscal stimulus bill that was passed in December, the outlook for economic growth and consumption has improved markedly. Second, as evidenced by rising commodity prices and stabilization in critical categories such as shelter and transportation, inflation is in the process of bottoming and is likely to turn upwards later this year. Finally, thanks to still-accommodative monetary policies, borrowing costs are low and should remain cheap in the near term.
FX: Updated FX Forecasts
Arne Lohmann Rasmussen, Senior Analyst, Danske Bank
This week we published our updated FX Forecasts. Our fixed income analysts still forecast that the ECB will start to tighten monetary policy in Q4 11, not far from current market pricing, whereas we believe that the market is far too hawkish about the Fed. The Fed is expected to continue to focus on the high unemployment rate and low core inflation, whereas the ECB has its focus on headline inflation, which is boosted by high commodity prices.
This monetary divergence is the key reason why we continue to see EUR/USD rising throughout 2011. In fact, we have moved some euro strength forward in our forecasts. We now expect EUR/USD to hit 1.42 in six months’ time, compared with 1.38 in the previous forecast update. We still see EUR/USD trading at 1.45 12 months from now.
Soft Data This Week Do Not De-Rail the Expansion
John E. Silvia, Chief Economist, Wachovia
Economic data this week were mixed as industrial productiondeclined for the first time since June 2009 and retail sales came in well below consensus expectations. Despite the miss for theseindicators, our forecast for continued economic expansion is notmaterially swayed. When you look past the headline numbers, theunderlying details are more encouraging.
Retail sales increased only 0.3 percent in the month, a smallergain than the 0.5 percent jump the consensus had been expecting. It appears as though weather played a bigger role this Januarythan it usually does. This past month was the coldest January since 1994 across the contiguous Unites States. Sales at storesselling building materials, garden equipment and supplies fell 2.9 percent, exerting the largest drag from any kind of business.Restaurants and drinking places also reported smaller sales. Looking forward, we do not expect consumer spending to grow atthe same breakneck pace we saw in the fourth quarter when personal consumption expenditures surged at a 4.4 percentannualized rate. That was the fastest pace of growth in consumer spending since 2006. We still think consumer spending will grow,but with an elevated unemployment rate and ongoing challengesin the housing market, a pace of about 2.5 percent or so seemsmore sustainable.
United States – Risks & Recovery Alistair Bentley, Economist, TD Bank Financial Group There has been a lot for investors to digest this week, from turmoil in the Middle East to higher inflation. Overall, the news has been upbeat, and shows that the US economy is strengthening. This, in turn, is lifting stock prices, and the S&P is now up 6.5% on the year. While the stars are still aligned for stronger growth in 2011, this week’s events also hinted that investors must always be wary of the risks, be it higher energy prices or unsustainable deficits.
Unrest continued in the Middle East this week, with protesters taking to the streets in Iran, Bahrain, Yemen and Libya. It is encouraging to see democracy springing to life. But, these countries produce 8% of the world’s oil and the unrest could have a bigger impact on energy markets than Egypt. For now, West Texas Intermediate has been trading in a steady range between $84-$87 a barrel. Keep tuned in though, because this ongoing struggle could lead to higher oil prices in the weeks ahead.
King Speech Fails to Calm U.K. Rate Fears
Lloyds Bank Corporate Markets
Fixed income markets endured another bruising week last week in the wake of a drop in US unemployment, sharp jumps in global PMIs and unsettling comments from Fed Chairman Bernanke over the outlook for the US fiscal deficit. We expect Bernanke to return to this topic this week in testimony to the House Budget Committee. Otherwise, international economic news is thin on the ground, which will keep investors focused on the evolving situation in Egypt. From a domestic perspective, our main focus is Thursday’s MPC announcement.
A gradual ratcheting of interest rate expectations has left SONIA money market rates fully anticipating the first 0.25% hike in Bank Rate in May and go a long way to pricing another two subsequent increases by year-end. So is there any chance of a change in policy this week?
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