Weekly Bank Research Center 5-28-07
Back to Goldilocks?
Stephen Roach, Head Economist, Morgan Stanley
Overheating concerns appear to be receding The financial markets appear to be pricing in reduced overheating concerns on the back of favorable weekly inflation data. More importantly, there have been no fresh tightening measures announced by the central bank in the past two months. This compares with back-to-back measures announced by the central bank every month for the four months beginning December 2006. Given the pause in tightening measures, coupled with reduced headline inflation, we believe that the market may be going back to pricing in the goldilocks environment.
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SNB Singing the Blues Again, but Surely it Will Stick to the Beat in June?
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[/B] [/B] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
As mentioned here before, there is growing speculation about what the Swiss National Bank will do at the upcoming monetary policy meeting on June 14. In the past week, the bank poured further fuel on the fire when first governor Jean-Pierre Roth and then board member Thomas Jordan repeated the bank’s now all-too-familiar lament: the CHF is too weak, the weak CHF may fuel inflation, and the SNB is ready to act if this happens. Even though the SNB has repeated this mantra to the point of distraction, and even though the market has therefore had a tendency to ignore it, on this occasion we did actually see an increase in Swiss money market rates and a stronger CHF. This is probably because uncertainty about future monetary policy is relatively high, and if two of the three members of the governing board come out with statements like this, the SNB must be trying to soften the market up for a more aggressive monetary policy stance, or is it?
[B] [B][B][B] [B] Bank of Canada to Set the Stage for a Rate Hike Next Week
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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group
The next big test for the Canadian dollar will come next Tuesday when the Bank of Canada (BOC) releases its interest rate decision. The Bank is widely expected to maintain its overnight rate at 4.25%. However, there has been growing speculation that the Bank will put more weight on the inflation risks than it did in the April Monetary Policy Report (MPR), which could set the stage for a tightening move as early as the July meeting. In our view, it will be difficult for the Bank to turn a blind eye to the economic data releases over the past month that have unambiguously pointed to economic strength and percolating price pressures. With most major indicators for March coming in on the strong side, economic growth appears to have strengthened to about 3.5% in the first quarter of 2007, a full percentage point above the pace that the BOC had predicted in its April MPR and pushing the economy even further into a position of excess demand. Meanwhile, core inflation has defied Bank projections by accelerating to 2.5% in April, 0.5 percentage points above the Bank?s target.
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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