A Flurry of Central Bank Meetings the Focus of This Week's Report

Weekly Bank Research Center 5-6-07



US Gasoline Prices: Déjà Vu



Stephen Roach, Head Economist, Morgan Stanley

In the immortal words of the baseball sage, it?s like déjà vu all over again: Another spring is here, and for the third straight year, another surge in gasoline prices is underway. From a low of $1.60/gallon in January, wholesale quotes have jumped 40% to $2.25/gallon. The culprits: Strong US and global demand and seasonal supply shocks. US pump prices (an average of all grades) soared by 36% to $3/gallon and now seem likely to linger at that level for a while. Shocks to the gasoline supply chain could push them higher still. Will the resulting drain on wherewithal be the last straw for the much-maligned US consumer? And will the price runup rekindle inflation expectations, keeping the Fed on alert?
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                       [B] [B][B][B] [B]  US Economy: Now This is Soft Landing  

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

Now This Is Soft Landing Worries about a return of stagflation took a breather this week, as most of the major economic reports show overall growth and inflation moderating. Moreover, the slowdown in productivity growth does not look as ominous as it did previously. We continue to look for modest economic gains over the next few months, as the economy continues to digest the unwinding of the housing boom and awaits a resurgence in capital spending. The biggest news this week was this morning’s smaller than expected rise in non-farm payrolls. Non-farm employment increased by 88,000 jobs in April, just shy of our estimate of 95,000. Employment declined in construction and manufacturing, reflecting ongoing weakness in residential construction and the motor vehicle sector. Cutbacks were also evident in retail trade and financial services, which lost 26,100 and 11,000 jobs respectively. Hours worked also declined during the month, falling 0.4 percent for the overall private sector and by a like amount in the manufacturing sector. The decline likely means that output got off to a sluggish start in the second quarter.
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Spotlight on the US Fed

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[/B] [/B] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

The coming week is all about monetary policy, with a rate-setting meeting at the Federal Reserve on Tues-day and Wednesday. There is broad consensus in the market and among analysts that the FOMC will leave the Fed Funds at 5.25%, and we share this view. As is generally the case, attention will focus instead on the language used in the ensuing press release. At the meeting in March, there were some relatively striking changes in the rhetoric: the FOMC softened its assessment of growth on the one hand, but expressed greater concern about inflation risks on the other. The committee also moved towards a more neutral stance in its assessment of future monetary policy, while still leaning towards further tightening as a result of the strong inflationary pressure. The question is whether the Fed will find reason to revise its rhetoric this time around and so reach a fully neutral stance. While there is a risk of this, we do not expect any major changes in the rhetoric.

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                                                                                                                                                                                                                                                                                                                             [B] [B][B][B] [B]  Global Expansion and US Inflation: The Two Witches  

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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group
It?s been only six weeks since the Fed?s last meeting when they stated that inflation was “somewhat elevated.” Since that time, there has been some evidence that inflation is starting to ease as expected. While the three-month annualized pace of core PCE inflation is running at 2.4%, just slightly above where the Fed would be comfortable, the year-over-year pace is just 2.1%. Today?s employment report also showed monthly wage growth has decelerated for the second month in a row. While wages continue to grow, the strong wage gains we saw at the end of 2006 have now dissipated. Increasing productivity growth and slowing compensation growth in the first quarter, should also help limit labour cost?s push on inflation. But the Wicked Witch of the West - inflation - should not be treated too lightly. There may not be minions of flying monkeys wreaking havoc, but globalization is doing its best to fill in this void. We are increasingly seeing the traditional link between inflation and domestic capacity pressures break down. Typically, a low unemployment rate would be driving up wages as employers bid for scarce workers. But, the increasing dispersion of corporate production around the world has also spread out capacity pressures. As a result, the peaks of inflation have proven more moderate, but the changes have proven much stickier.

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             [B] [B][B][B] [B]  Other Pre-screened Independent Contributors[/B]

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