<strong style=""> US Fed will almost certainly cut interest rates on Tuesday
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

Comments by Fed members, including Chairman Bernanke, as well as another month of weak data - declines in the November ISM manufacturing and services surveys and continued weakness in the housing market - have cemented the market view that US interest rates will be cut by 25bp or even by as much as 50bp on Tuesday. We are calling a cut of 25bp to 4.25%, although given growing concern by some that the economy could dip into recession, a larger 50bp cut is a possibility, although unlikely in our view. With the US Fed ahead with cutting rates, the Bank of England having delivered its first in a series of expected cuts and the ECB holding rates at 4%, despite serious concerns over inflation, markets have largely reacted to data on growth rather than prices. But this may be about to change as inflation fears resurface, leading to a softening in market perceptions of the speed and direction of interest rate movements. This week, data may show strong growth of producer prices and wages, as well as high levels of capacity utilisation, bringing a chilling reminder that inflation pressures are mounting in the major economies. The Norwegian Central Bank and the Swiss National Bank may pause their long run of hikes, holding rates, at 5.0% and 2.75% respectively.


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Weekly Bank Research Center 12-10-07






Euroland: ECB Not There Yet
<strong style="">

Stephen Roach, Head Economist, Morgan Stanley
As expected, the ECB left interest rates unchanged at 4% after this week&rsquo;s Governing Council meeting. But the subsequent press conference was more hawkish than most observers had expected. The ECB not only retained its tightening bias by reiterating that the risks to price stability are to the upside. The Council also discussed hiking rates as an alternative option to the holding operation, according ECB President Trichet. Some Council Members were in favour of hiking rates, Mr Trichet revealed, in a rare departure from his usual emphasis on the broad-based consensus in the Council. So, if anything, the ECB still seems to be leaning towards higher, not lower rates at this stage. The hawkish tone underpins our view that an ECB rate cut remains an outside scenario, unless we see a marked deterioration in the data flow. We continue to believe that an extended period of unchanged ECB interest rates is the most likely scenario for 2008.
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<strong style=""> Markets again dictating Fed policy
<em> Niels-Henrik Bj&#248;rn S&#248;rensen, Senior Analyst, Danske Bank
Monetary policy has been very much dictated by the financial markets this autumn. The US central bank has so far cut rates by 75bp, to 4.75% from 5.50%, in reaction to the financial crisis. This was in part to counter any negative economic effects of the crisis, and also to neutralise the artificial tightening of monetary policy that increased risk premiums . eg, in the money markets (see graph below) . have brought about. However, at its last meeting on 31 October, the Fed indicated that it would wait and see before considering further adjustments to monetary policy. Given the Fed.s expectation of low growth in the coming quarters, this was a relatively clear statement of intent. But the financial crisis has since then flared up again, with renewed turmoil in the credit and money markets. This has forced both the chairman, Mr Bernanke, and the vice chairman, Mr Kohn, to considerably soften the rhetoric in their latest speeches.

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<strong style=""> Employment surprises in Canada, decent in the U.S.
Steve Chan, Economist, TD Bank Financial Group
The latest employment data shows nothing of the kind that would justify protracted and significant easing of the overnight rate beyond a further 25 to 50bps. Employment rose by 42,600 in November. While about 2/3 (when excluding self-employed) of net jobs created so far this year have been in the public sector, the private sector joined the party in November. So far this year, the Canadian economy has created close to 400,000 net new jobs, a remarkable erformance. Even more astouding is that this is over-and-above the close to 100,000 jobs that have been shed in manufacturing. Regionally, B.C. and Qu&#233;bec have contributed significantly more to this year&rsquo;s employment bonanza than their real GDP weight in the Canadian economy would suggest. This is noteworthy since one would expect the opposite, given of the high concentration of manufacturing in Qu&#233;bec and forestry activity in both those provinces. But it highlights the fact that well-diversified economies can absorb significant job losses. While the national unemployment rate edged up 0.1 percentage points in November to 5.9% due to a large (67,600) influx of people into the labour force, very little if any slack exists in labour markets. Year-over-year wage growth (4.1%) for permanent employees is at its highest level since this data series started being collected ten years ago. So far, along with higher food and energy prices, this has not fed through significantly into inflation expectations or consumer prices. Past experience suggests that it can. It would make the BoC&rsquo;s job all that much more difficult if it did. In any case it limits the extent of interest rate relief the BoC can provide going forward.

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<strong style=""> US Economy To See Another Sigh of Relief
John E. Silvia, Ph.D. Chief Economist, Wachovia
Given all the worries about an unending tide of mortgage defaults and possible U.S. recession, this week&rsquo;s economic news and the agreement between the Treasury and major mortgage providers to freeze interest rates on some adjustable rate subprime mortgages provides a huge sigh of relief for the financial markets. While we are not out of the woods, the data throw another bucket of cold water on folks calling for a recession. Nonfarm payrolls increased by 94,000 during November and factory orders came in stronger than expected. The ISM surveys softened a touch but remain consistent with at least modest economic growth. Productivity growth came in well ahead of expectations, which provides the Fed with even more latitude to respond to any challenges we face from the mortgage crisis.

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