Oil Prices, US Growth, and Carry Trades All Under the Same Roof

[B]Weekly Bank Research Center 7-09-07[/B]


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[B] Revisiting US$80/bbl Oil Prices?
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]

                                                                           The price of crude oil is blazing again.  On the London IPE, the Brent swap                                        price rose to US$75 during the week and markets are so nervous that a further                                      rise is a possibility.  Are these renewed tensions coming from the demand, or                                      the supply side?  This distinction is crucial for the analysis of the economic                                     consequences of the price spike, if this turns out to be one: if prices go up                                      because of stronger demand, then the causality link goes from GDP growth to oil                                    prices and we should not worry too much.  If supply factors are behind the rise,                                   then the causality is inverted and aggregate demand could suffer.                                                                                                                                                                      
                                                                                                                                                                                                                                                           [Full Story](http://www.morganstanley.com/views/gef/index.html#anchor5137)
                                                                                                                                                                                                    

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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]

                                                                                                                                                                                              This past week's economic reports are consistent with our view that economic                                       growth rebounded solidly in the second quarter. Our latest estimate has GDP                                        growth up at a 3.5 percent annual rate for the quarter. June's solid employment                                    report and the 75,000-job net upward revision to the previous two months make                                      such a gain all the more likely. Nonfarm employment increased 132,000 in June,                                     very close to our estimate of 135,000 jobs. With June's gain, nonfarm payroll                                      growth averaged 148,000 new jobs per month during the second quarter. Aggregate                                    hours worked rose at a 2.3 percent annual rate during the second quarter. If you                                   plug in even a modest 1.5 percent rebound in productivity growth, you get a 3.8                                    percent rise in output. Such calculations quickly made their way to the trading                                    pits, which is one reason why the yield on the Treasury's 10-year note briefly                                     rose back up near 5.20 percent. Job gains were fairly broad-based in June, and                                     even construction payrolls posted solid gains. Beneath the surface, there are                                      some key trends that should shed light on future economic conditions.                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                           [Full Story](http://www.wachovia.com/ws/econ/view/0,,3848,00.pdf)
                                                                                 
                                                       
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
The current focus of financial market debate in the UK is on how high interest rates will have to rise in order to slow down economic growth and reduce inflation to the 2% target. To our mind, this debate is somewhat unbalanced, as the decision to raise Bank Rate to 5.75% in July is unlikely to have been unanimous, suggesting that rates cannot continue to be pushed higher without there being further economic evidence to support it. Some MPC members want to wait and see what effect the 5 increases since August last year have had or are having on the economy before taking any further action.

                                                                                                                                                                                                                                                           [Full Story](http://www.lloydstsbcorporatemarkets.com/media/pdfs/Economicresearch/Econweekly/fm_ew_09_07_2007.pdf)
                                                                                 
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Canada had little data of any significance until Friday morning. If financial markets needed one final spike driven into the ground to cement expectations that the Bank will hike by 25 basis points on Tuesday, today?s employment report did the trick. In the month of June, 35,000 new jobs were created - double market expectations - and the unemployment rate held at over a 30-year low of 6.1%. Tight labour market conditions also helped drive wages for permanent workers up by 3.2% on an annual basis, the highest rate since the third quarter of 2006. The Canadian economy is already operating at a level deemed to be in excess demand, and real GDP growth has consistently exceeded the Bank?s expectations in the first half of this year. Meanwhile, inflation is proving to be sticky, with core CPI holding above the Bank?s 2% target for nine consecutive months. Since the central bank already noted at its May policy meeting that “some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target”, at this point it?s a bit of a no-brainer that they will raise rates on Tuesday. And even the high-flying loonie at 95 U.S. cents won?t deter them.

                                                                                                                                                                                                                                                           [Full Story](http://www.td.com/economics/weekly/jul607.pdf)
                                                                                 
                                                       
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[/B] [/B] [I] J-Chart [/I]
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