Bank Research Consensus Weekly 10-05-09

While financial markets keep feasting on the global liquidity glut, there is a subtle but undeniable shift underway in the central bank community towards eyeing not only the end of easing, but the beginning of tightening. To be sure, our central bank watchers expect the Fed, the ECB and the Bank of England to start nudging rates higher only from around the middle of next year, and the Bank of Japan to even ease policy further.

[I]Joachim Fels, Global Economics Team, Morgan Stanley [/I]

[B]Weekly Bank Research Center 10-05-09[/B]

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[B]As the Policy Cycle Turns…[B][/B][B][B][B][/B][/B][/B][/B][B][B][B][B][B][/B][/B][/B][/B][/B]

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[I] Joachim Fels, Global Economics Team, Morgan Stanley [/I]

 While financial markets keep feasting on the global liquidity glut, there is a  subtle but undeniable shift underway in the central bank community towards  eyeing not only the end of easing, but the beginning of tightening.  To be sure,  our central bank watchers expect the Fed, the ECB and the Bank of England to  start nudging rates higher only from around the middle of next year, and the  Bank of Japan to even ease policy further.  However, several other G10 and  emerging market central banks look set to tighten policy over the next 3-6  months, and it appears likely that the rhetoric from those who will remain on  hold over that period becomes gradually more hawkish (less dovish).  This  combination of action by some and talk by others may well challenge the  prevailing post-Jackson Hole and post-G20 consensus that rates in the major  economies will remain low for longer.   

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[B] Euro Weakens - Relative Rates Again Important [/B][B][/B]

[/B] [/B][/B] [I] Kasper Kirkegaard, Chief Economist, Danske Bank[/I]<em>

                                                                                                                                                                          A relatively volatile week on the FX market saw major fluctuations in most of  the main crosses. Implied volatility on short options (a measure of the scale  of expected fluctuations) is generally trading higher, and has risen on the yen  and New Zealand dollar in particular. The euro also had a tough week, weakening  against all G10 currencies, but the Swedish krona and the Swiss franc – helped  by possible intervention by the SNB (see Switzerland). The euro fared  particularly badly against the dollar currencies – EUR/USD has fallen from 1.48  to test 1.45 – but also the Asian currencies appreciated, with the South Korean  won and the Philippine pesos considerably higher. Finally, note the turnaround  in the rouble, which ended September almost 4% stronger against the euro.                

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[B] Economic Recovery Accompanies Credit Improvements [/B][B][/B]

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

                                                                                                                                                                         As we enter the second quarter of the economic expansion, the recovery will be  accompanied by continued increases in issuance and decreases in credit spreads  as they both reflect the improvement in corporate profits. Investment grade  corporate spreads have now returned to pre-crisis levels. Since May, interest  spreads on both high grade and high yield bonds have declined while issuance has  improved. Historically, a decline in interest rate spreads has been a leading  indicator of an economic recovery and this pattern has reasserted itself. Even  AAA CMBS spreads have declined in recent months as the Fed’s TALF program has  taken hold for high-quality, asset-backed securities.                                                  

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[B][B][B][B][B] Canada - Reflecting as Autumn Winds Blow [/B][/B][/B][/B][/B][B][B][B][B][B][/B][/B][/B][/B][/B]

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[I] Diana Petramala, Chief Economist, TD Bank Financial Group [/I]

 With Canada’s economy having turned the corner in June, markets are stuggling  to assess how recovery will unfold and how monetary stimulus will be unwound.  Our view is that the recovery will be sluggish compared to the 1983 rebound and  only modestly better than that following the 1990s recession. We project growth  of 2.6% to emerge in Q3/2009 and a pace of 2.4% to be sustained during 2010. Although potential growth has slowed, the forecast pace of real growth implies  Canada’s “output gap” (i.e. excess capacity) will narrow rather slowly, only  closing by late 2012.  

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[B][B][B][B][B] Is The Fall in Sterling Good or Bad News? [/B][/B][/B][/B][/B][B][B][B][B][B][/B][/B][/B][/B][/B]

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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]

 Judging by the fevered headlines surrounding the fall in the UK’s exchange rate  over the past couple of weeks, one might imagine that sterling was on the verge  of a currency crisis. We argue that it is not. We examine the reasons for the  recent decline in the UK currency and assess its prospects going forward. Our  conclusion is that, far from being a cause for concern, the depreciation is not  only desirable, but essential if the UK is to undergo a successful rebalancing  away from domestic demand towards net exports over the coming years. Indeed,  judging by the comments made by Bank of England Governor Mervyn King last week,  and a recent article published in its latest Quarterly Bulletin, this view  appears to be shared by the Bank of England.  

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

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[I] J-Chart [/I]

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[I][B]Compiled By: David Song, Currency Analyst and Michael Wright[/B][/I]