ECB to Do Less Later
Elga Bartsch,Chief European Economist, Morgan Stanley
The risks to our ECB call for 50bp of further rate cuts and outright Quantitative Easing (QE) in 1H12 have increased markedly in recent weeks. Euro area money markets have essentially priced out all ECB easing this year. The monthly ECB press conferences have become increasingly upbeat. Financial markets for risky assets have experienced a sharp rally in early 2012, fuelled by actual and expected LTRO liquidity. Business sentiment, at least in the core countries, appears to be stabilising. Globally commodity prices are on the rise.
FX: On the other side of the LTRO
Kasper Kirkegaard, Senior Analyst, Danske Bank
The second 3Y LTRO met market expectations as EUR529.5bn was borrowed at the auction. This secures plenty of liquidity in the system. The effect on the currency market is likely to be the same as following the first 3Y LTRO in December – just less forceful.
Normalization and Lingering Issues
John E. Silvia, Chief Economist, Wells Fargo
Credit markets for the non-financial corporate business sector have taken on the appearance of a balanced market for bank lending and a much more solid capital market. The net percentage of banks tightening standards and those reporting stronger demand appears to be fluctuating around neutral. The bank credit market for private-sector business lending appears to have stabilized at this point in the economic expansion. In addition, the pattern of C&I loans appears to follow the pattern of inventory gains. Business lending through banks appears consistent with the economic forces of inventory finance and little evidence exists of a credit crunch at banks at this time. Moreover, banks of all types, domestic and foreign, small and large, appear to be contributing to the growth of lending overall.
United States – For The Optimist, A Glass Half Full
Martin Schwerdtfeger, Senior Economist,TD Bank Financial Group
There were a host of macroeconomic policy developments and data releases to keep investors busy throughout the week. In the U.S., equity markets reacted with some disappointment on Wednesday after Fed Chairman Bernanke sounded relatively less dovish in his semi-annual testimony before the Financial Services Committee. Indeed, Mr. Bernanke omitted any explicit mention to potential further long-term asset purchases – quantitative easing – by the Fed. He also highlighted that the Fed’s commitment to low interest rates until late 2014 is not set in stone, but conditional on the evolution of the economy. This does not imply a departure from what up to now has been, and still remains, an extremely accommodative policy stance. It is just an acknowledgement of the recent improvement in economic conditions, in particular the better tone of labor market indicators of late.
Compiled by David Song, Currency Analyst