Our main focus is on the fact that the effect of the credit crisis, in forcing the US to grow more slowly (and others to adjust to that) and in reducing its trade and current account deficit, is effectively raising the US savings rate. This could be one of the few bits of good news that comes out of the credit crisis, because it helps to reduce one of the key global imbalances that the IMF has warned in the past had the potential to derail the world economy. Indeed, such a correction might have had an even greater impact on the global economy than the credit crisis appears to be exerting, because it might have hit the emerging economies harder.
[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets[/I]
[B]Weekly Bank Research Center 04-14-08[/B]
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[B][B][B][B][B] The Rise and Fall of Intra-EMU Diversification [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
Last week, we proposed a hypothesis that may help to explain why the EUR is so strong (see Why Is the EUR So Strong: a New Hypothesis, April 3, 2008). In that note, we argued that, in this age of financial and trade globalisation, most countries in the world have exhibited a declining trend of financial ‘home bias’ – which is the ratio of financial assets held in local currencies relative to those held in foreign currencies. In the case of the US, we observed that their real money accounts, which have around US$22 trillion in assets under management (AUM), have aggressively diversified out of USD assets since 2003. Japanese retail investors, similarly, have begun to reduce their financial ‘home bias’ since summer 2006. Retail investors in emerging Asia and Latam have followed the same trend. This makes sense: not only is the globalising world offering rewarding investment opportunities in various parts of the world, but the benefits of financial diversification have also become more obvious and realisable as improved information on different markets has helped investors to be more comfortable with holding exposure to assets of faraway countries. But in Euroland the trend has been exactly the opposite. Since 1999, the financial ‘home bias’ has risen drastically. These divergent trends in ‘home bias’, we argued, are a key force distorting the currency markets as the EUR is pushed deep into overvalued territory against most currencies. NB would cut interest rates quicker.
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[B] More Worrying Data in Prospect [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
There was little in the way of optimism to be found in the minutes of the last FOMC meeting published on Tuesday evening (see also Flash Comment . FOMC: More doom and gloom). The Federal Reserve has revised its growth expectations markedly downwards since the beginning of the year. Both the Fed staff and several members of the FOMC now anticipate negative growth in the first two quarters, followed by a gentle upswing in the second half. Although the Fed is sticking to its main scenario of economic growth returning to just above trend during the course of 2009, a number of FOMC members have begun to fear a longerlasting downturn. On the other hand, other members are expressing growing concern about inflation, as illustrated by two members voting against the 75bp rate cut. In other words, there are the beginnings of a split within the FOMC over whether to focus solely on growth or also keep half an eye on the high rate of inflation. As we wrote last week, this may put a limit on how much further monetary policy can be eased. However, given the prospect of a continued stream of weak activity data in the coming months, we still reckon that the fed funds rate will be cut by 50bp in April and 25bp in June, which means that it will hit 1.50% before the Fed goes on hold.
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[B] Domestic Demand Is Much Weaker Than GDP [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
This is one of the most confounding periods for economics we can remember. On the surface, the economic picture seems pretty clear. The housing slump and related credit crunch have spread to other areas, pulling the overall economy into its first recession in seven years. To many, the pain is obvious in declining sales, weakening stock prices, rising foreclosures and increased layoffs. The fact that first quarter real GDP will now likely eek out a small gain raises the question of whether or not we can have a recession without significant declines in real GDP. The short answer is yes. A recession is a pronounced, prolonged, widespread decline in aggregate economic activity. Such a decline is usually evident in four indicators: employment, industrial output, real after-tax income, and inflation-adjusted business sales.
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[B][B][B][B][B] U.S. Focus Shifts to “How Deep, How Long?” [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
Concerns over the U.S. economy have shifted in recent weeks. The focus up to recently seemed to have been an understandable, but misguided, fixation on whether or not the U.S. is technically in a recession. The jury on this, which is the cycle dating committee of the National Bureau of Economic Research, doesn’t offer its verdict until much later after events have unfolded. Much confusion arises in the meantime as the only thing anyone can provide until then is a forecast, be it theirs or someone else’s. Anyone claiming the U.S. economy is currently in a recession is providing you with their forecast, not a statement of fact. By the same token, anyone claiming the U.S. is not in recession is offering, you guessed it, their forecast. As time passes and more data comes in, uncertainty surrounding the forecast dissipates and the likelihood of it being correct improves – nothing more, nothing less. Think of the NBER as the Pope (insert alternative authoritative religious figure here as needed) of recessions, but given the huge lag, we don’t advise waiting around for the ‘final’ word. TD Economics’ forecast is that the U.S. economy is indeed currently in the midst of a recession, which will record two non-consecutive quarters of real GDP contraction. By itself, the fact the quarterly contractions are not expected to be consecutive would make this an atypical recession. But there are other more substantive issues which would also make the current recession unlike those past. Overall, our U.S. forecast stands on the slightly pessimistic side of consensus, but is not currently quite as bearish as that of the IMF. The accompanying table compares the IMF forecast from April to ours from March.
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[B][B][B][B][B] Will the Credit Crunch Help Ease Global Imbalances? [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Our main focus is on the fact that the effect of the credit crisis, in forcing the US to grow more slowly (and others to adjust to that) and in reducing its trade and current account deficit, is effectively raising the US savings rate. This could be one of the few bits of good news that comes out of the credit crisis, because it helps to reduce one of the key global imbalances that the IMF has warned in the past had the potential to derail the world economy. Indeed, such a correction might have had an even greater impact on the global economy than the credit crisis appears to be exerting, because it might have hit the emerging economies harder.
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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]
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.