Financial markets have again deteriorated in recent weeks. Meanwhile, economic data have increasingly indicated that the US economy is heading for recession; last Friday?s employment numbers and Thursday?s retail sales figures both pointed to a fall in economic activity in February. This was also true of the ISM reports, which showed a downturn in activity in both the service and the manufacturing sectors. In other words, there is a measureable probability that the coming quarters may fulfil the definition of a reces-sion. The combination of the continuing problems in the financial markets, the sustained downturn in the housing market and the increasingly strong indications that the rest of the economy is stagnating, constitute grow-ing worries for the US central bank. One of the central bank?s worries is that the problems in the financial markets are preventing monetary policy from working optimally. This may mean a greater share of rate cuts than normal being ?eaten up? by the problems in the financial system before the cuts reach consumers and companies. This is why the Federal Reserve has taken a number of steps in the past week to help increase liquidity in the money markets and so ease the stress in the financial markets, thereby en-suring a more frictionless transmission of the rate cuts.
[I]Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank[/I]
[B]Weekly Bank Research Center 03-17-08[/B]
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[B][B][B][B][B] Still on Intervention Watch, but Time Not Yet Ripe [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
A hyper-proactive Fed, coupled with economic data supportive of the economic de-coupling thesis, has contributed to the relentless decline in the dollar. We believe that the dollar will remain vulnerable in the coming weeks, at least until there are more convincing signs of economic re-coupling in the world outside the US. However, in this transition period, the decline in the dollar, in our view, is starting to fuel vicious circles which, in turn, are negative for the dollar. We believe that the probability of coordinated interventions (CI) is rising, though the risk of such an event is not imminent, as some key prerequisites are not yet met. The recommended tactical posture is to remain short the dollar. Nevertheless, we remain on intervention watch, tracking whether the preconditions for CIs are met.
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[B] Fed Will Not Disappoint. 75bp Rate Cut on the Cards [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
Financial markets have again deteriorated in recent weeks. Meanwhile, economic data have increasingly indicated that the US economy is heading for recession; last Friday’s employment numbers and Thursday’s retail sales figures both pointed to a fall in economic activity in February. This was also true of the ISM reports, which showed a downturn in activity in both the service and the manufacturing sectors. In other words, there is a measureable probability that the coming quarters may fulfil the definition of a recession. The combination of the continuing problems in the financial markets, the sustained downturn in the housing market and the increasingly strong indications that the rest of the economy is stagnating, constitute grow-ing worries for the US central bank. One of the central bank’s worries is that the problems in the financial markets are preventing monetary policy from working optimally. This may mean a greater share of rate cuts than normal being “eaten up” by the problems in the financial system before the cuts reach consumers and companies. This is why the Federal Reserve has taken a number of steps in the past week to help increase liquidity in the money markets and so ease the stress in the financial markets, thereby ensuring a more frictionless transmission of the rate cuts.
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[B] What’s The Fed to Do? [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Policymakers at the Federal Reserve probably have not had a good night’s rest in some time. Not only did they announce the new lending facility on Tuesday, but they also had to contend with the liquidity issues at Bear Stearns at the end of the week. This Tuesday, the FOMC will gather around the big oak table at the Federal Reserve Board to discuss how much to change the target for the fed funds rate, which currently stands at 3.00 percent. How much will the FOMC cut? If the decision were based purely on economic data, a rate cut of 50 b.p. would seem like the most likely bet. The economy is clearly weak, but it is not collapsing either. The Fed has already cut rates by 225 b.p. since September (125 b.p. alone in January). Although some folks are worried about inflation, the February inflation data, which were much lower than most investors had expected, gives the Fed the ability to continue to cut rates. However, as our opening paragraph makes crystal clear, events are EXTREMELY fluid at present. Should Bear Stearns (or another major financial institution) fail, a major financial panic would ensue. One of the Fed’s responsibilities is to act as lender of last resort. Not only would it need to extend direct financing to troubled financial institutions, but it would also need to cut the fed funds rate significantly in order to cushion the blow to the real economy.
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[B][B][B][B][B] Weakness in U.S. Data Seal the Deal on Additional Fed Rate Cuts [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
With oil prices pushing past $110 barrel, a very soft retail spending report and news of the collapse of a major U.S. hedge fund, the timing of Friday’s consumer price report could not have been better. While U.S. Treasuries rallied on the expectation that softening inflation seals the deal on at least another 50 basis points in rate cuts when the Fed meets on Tuesday, the response in equity markets was crowded out by yet more bad news from financials - this time with Bear Stearns announcing it was seeking emergency funding to avoid a major cash crunch.
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[B][B][B][B][B] Big Moves by the Fed - US dollar Tumbles [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Despite the huge scale of the US Fed’s cash injections to date, the dollar’s trade-weighted index fell to a record low of 71.57 on credit woes and fears about the health of the US economy. The US dollar broke new lows against the euro, the Swiss franc and the yen. €/ $ hit a new high of $1.5687 on Friday. Against the Swiss franc, the greenback fell to 0.9987 and against the yen to 99.89, the lowest level since October 1995. Sterling closed 0.7% higher against the dollar at $2.0295, but down 1.1% against the euro at €1.2991. The New Zealand and Australian dollars, the Scandinavian currencies and the Canadian dollar also rose significantly against the US$ this week. Concern about the health of the US economy had wider implications, including propelling oil and gold prices to new peaks as investors bought commodities and bonds as a hedge against inflation and further dollar weakness. NY oil futures peaked at $110.92 a barrel and gold spot broke an all time record high of $1007.4oz.
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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.