Hoping for continued declines in interest rates is not an investment strategy— particularly as economic fundamentals begin to support the case against further declines. At this point we expect only one more cut in the funds rate by the Federal Reserve while also expecting a modest rise in the benchmark ten-year Treasury rate. How can this call for a limit to lower rates be consistent with the current stage of the economy in mid-recession? Downside risks to growth do remain but a forward looking market place and a Fed both suggest that growth will revive in the second half of this year and that further significant easing at this point would increase inflation concerns more than reassure the markets about economic growth. At the latest Federal Open Market Committee meeting two dissents suggest a limit to some policy makers’ willingness to ease in the face of what they see as rising inflation risks.
[I]E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
[B]Weekly Bank Research Center 03-31-08[/B]
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]No Recession in Sight, but CAD Could Be at Risk [/B]
[/B][/B][/B]</p> [I]Stephen Roach, Head Economist, Morgan Stanley [/I]
The Canadian economic slowdown will likely be deeper and longer than previously thought. The recession in the US, coupled with weaker growth elsewhere, will likely mean that the drag coming from exports will persist for longer than expected. In addition, continued pressures in the financing market have increased the cost of borrowing for corporations and consumers, while some confidence effects will moderate domestic demand from the current strong level going forward. With slower growth, continued financial market frictions and low inflation, the Bank of Canada will likely continue to cut rates aggressively, and I expect a 50bp cut at the April 22 meeting. In the medium term, I see some risks that USD/CAD will move sharply higher following a USD appreciation, coupled with lower commodity prices.
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]Dollar Weakness to Continue [/B]
[/B][/B][/B] <em>Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The past week produced a string of data that all supported our view of continuing relative underperformance by the US economy. Tuesday saw depressing numbers on both the US consumer and the US housing market . consumer confidence hit its lowest level since the recession in 1990, while a historically large fall in the Case/Shiller house price index underlined that the housing market is still not showing any sign of stabilising. Meanwhile, a larger-than-expected decline in new orders indicates a further fall in industrial activity in the coming months. In Europe, however, the picture is somewhat opposite. On Wednesday, the German Ifo index once again surprised on the upside, rising for the third month in a row. French and Belgian busi-ness confidence also delivered positive surprises in the past week, portraying Europe as an economy that still has not lost all of its momentum. Adding to this image, ECB chief Trichet indicated in his speech to the European parliament that the ECB still sees no reason to ease monetary policy, as inflationary pressure is still high and the European economy remains fairly robust. This suggests two things: (1) the risk of central bank intervention in the FX market remains low, as the ECB is maintaining its hawkish stance, and (2) we will presumably have to wait longer than expected for a shift in European monetary policy, and hence also for a cyclical turn in EUR/USD.
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]Fundamentals & Limit to Lower Rates [/B]
[/B][/B][/B] [I]E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Hoping for continued declines in interest rates is not an investment strategy— particularly as economic fundamentals begin to support the case against further declines. At this point we expect only one more cut in the funds rate by the Federal Reserve while also expecting a modest rise in the benchmark ten-year Treasury rate. How can this call for a limit to lower rates be consistent with the current stage of the economy in mid-recession? Downside risks to growth do remain but a forward looking market place and a Fed both suggest that growth will revive in the second half of this year and that further significant easing at this point would increase inflation concerns more than reassure the markets about economic growth. At the latest Federal Open Market Committee meeting two dissents suggest a limit to some policy makers’ willingness to ease in the face of what they see as rising inflation risks.
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]Is the Commodity Bubble Bursting? [/B]
[/B][/B][/B]</p> [I]Steve Chan, Economist, TD Bank Financial Group [/I]
While many export-oriented sectors of the Canadian economy are feeling the impact of a slowing U.S. economy, commodity-based companies are faring better as a result of the recent run-up in prices. Over the past few months, the trend in commodity prices has largely reflected fluctuations in the U.S. dollar against the euro. And last week was no exception. A massive sell-off in commodities occurred as the greenback showed some signs of life, rising from the record lows reached earlier in the week. The 4.5% drop in commodity prices as measured by TD’s commodity price index was widely spread, spurring some chatter that the commodity bubble was bursting. In particular, crude oil prices fell from their recent high of US$110 to about US$101. All base and precious metals prices also took a hit, as investors began to fear that the slowdown in the U.S. economy would filter through to demand for commodities. Even prices of the supercharged agricultural products, namely wheat and canola, retreated as investors hit the sell button.
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]Weak US Economic Data Halt Dollar Recovery [/B]
[/B][/B][/B]</p> [I]Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Rising fears of a recession in the US saw the dollar come under renewed selling pressure this week, swiftly eroding some of its recent gains. Led by a surprisingly sharp fall in consumer confidence in March, US economic figures this week generally returned weaker than expected, raising the strong prospect of further interest rate cuts ahead. The weakness of the dollar, falling US inventories and a bomb blast in Iraq saw crude oil price futures rise sharply, buoying the Norwegian krone, which was this week’s biggest riser against the US$. The euro was supported by stronger than expected outcomes for German inflation and the IFO survey, underlining our view that the ECB will not cut interest rates in 2008. €/$ closed the week up 2.1% at 1.5755. $/Y was more volatile but closed up at 99.60, despite touching 98.57 intraweek. In contrast, the Swiss franc saw solid gains, with $/Chf easing below 0.99 after touching 1.025 at the start of the week. The pound failed to take advantage of a sharp narrowing in the UK’s current account deficit in the final quarter of 2007, with more attention given to comments by BoE governor King suggesting Bank rate could be cut next month. Although £/$ rose 0.4% to 1.9906 this week, £/€ fell by 1.7% and hit a record low of 1.2614. In emerging markets, a surprise 1.25% hike in interest rates provided some reprieve for the Icelandic krona but the Turkish lira stayed under strong selling pressure.
<strong style=“mso-bidi-font-weight: normal”>[B][B][B]
[B]Other Pre-screened Independent Contributors[/B]
[/B][/B][/B]</p> [I]J-Chart [/I]
J-Chart is an innovative charting and bias-neutral market analysis tool. Based on its proprietary theoretical concept and display of market price action, J-Chart provides a much clearer and unique insight into the market than conventional charting methods. This innovative charting and market analysis tool is designed to visualize market price action that constructs unique price patterns called “Equilibriums”. Based on its “non-fixed time frame” concept and “Kinetic Equilibrium” application, J-Chart users are able to forecast markets’ future movements with high accuracy.