More grief than glad tidings has generally been what the past week’s economic data have brought. Euroland retail sales, Spanish consumer confidence and pending home sales in the US all fell to all-time lows, while the French trade deficit rose to a record high. The UK saw falling activity in the service sector and weakening consumer confidence. Meanwhile, Germany, Norway, Sweden and Hungary experienced declining industrial production, and in Australia, New Zealand and Switzerland unemployment rose. More bad news than good is reflective of an economic cycle that is continuing to weaken. This is true of the industrial cycle, but even more so of consumption and housing. Industrial cycles are normally quite short (6-9 months), while housing cycles are long. The good news is that lower activity is often followed by falling in-flation, and indeed inflation receded this week in Ireland, Spain and Switzerland. Unfortunately (from the inflation perspective), the past week saw new records for energy prices, with oil above USD 124. Not only do rising oil prices mean upward pressure on inflation, they also undermine consumption. However, rising oil prices should support NOK, and we continue to expect EUR/NOK to fall to 7.75.
[I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank[/I]
[B]Weekly Bank Research Center 05-12-08[/B]
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[B][B][B][B][B] SWFs’ Impact on Financial Assets [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
In thinking about how the emergence of sovereign wealth funds (SWFs) may affect global financial prices, or the world’s risk-return balance, it may be useful to consider three different types of SWFs, based on the sources of the accumulation of official reserves/SWFs: (1) oil and other commodities; (2) goods or C/A surpluses; and (3) capital inflows. The sources of ‘funding’ of the rise in official foreign assets will likely dictate the risk-return profile of the investment portfolio of the central banks/SWFs in question. Specifically, Type 1 SWFs should have the highest risk-return profile because they essentially have no distinct liabilities. Type 2 SWFs should have a marginally lower risk-taking appetite than Type 1 SWFs because of the domestic bond liabilities. But the underlying savings-investment (S-I) surpluses should still imply future consumption and the ‘right’ of the surplus countries to accumulate claims on foreign assets, including equities. Type 3 SWFs, however, should have the lowest risk-taking appetite and therefore should have rather modest – and even negative – effects on the overall risk profile of the financial markets. Depending on the relative size of these three types of SWFs/reserves, the world’s risk-return balance may be altered in different ways.
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[B][B][B][B] Has EUR/USD Peaked? [/B][/B][/B][/B]
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<em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
More grief than glad tidings has generally been what the past week’s economic data have brought. Euroland retail sales, Spanish consumer confidence and pending home sales in the US all fell to all-time lows, while the French trade deficit rose to a record high. The UK saw falling activity in the service sector and weakening consumer confidence. Meanwhile, Germany, Norway, Sweden and Hungary experienced declining industrial production, and in Australia, New Zealand and Switzerland unemployment rose. More bad news than good is reflective of an economic cycle that is continuing to weaken. This is true of the industrial cycle, but even more so of consumption and housing. Industrial cycles are normally quite short (6-9 months), while housing cycles are long. The good news is that lower activity is often followed by falling in-flation, and indeed inflation receded this week in Ireland, Spain and Switzerland. Unfortunately (from the inflation perspective), the past week saw new records for energy prices, with oil above USD 124. Not only do rising oil prices mean upward pressure on inflation, they also undermine consumption. However, rising oil prices should support NOK, and we continue to expect EUR/NOK to fall to 7.75.
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[B][B][B][B] Commodity Prices in Historical Perspective [/B][/B][/B][/B]
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[I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Many commodity prices have shot up to all-time highs recently. However, the year-over-year rise in a broad index of commodity prices is not unprecedented. Indeed, the 29 percent increase in the CRB index over the past year pales in comparison to the 60 percent spikes that occurred in 1950-1951 and 1973-1974. Moreover, U.S. consumers spend a smaller percentage of their disposable income on food and petroleum products today than they did in previous episodes of sharply rising commodity prices, which should reduce the pernicious effects on other types of consumer spending and overall CPI inflation. However, the length of the current uptrend in commodity prices, which has been in place since October 2001, is unprecedented. This upswing has coincided with a period of very strong global GDP growth that has been driven, at least in part, by the forces of globalization. As long as these forces remain in place, which seems likely in the foreseeable future, long-run global GDP growth should remain reasonably solid. Although we believe the unfolding cyclical slowdown in global growth and our expectation of dollar appreciation in the quarters ahead should put downward pressure on most commodity prices, an outright collapse in prices does not seem likely.
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[B][B][B][B][B] The Gloom Beneath the Cheer [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
Much has changed since early spring when the Fed was delivering monetary stimulus at a fast and furious pace. Though the U.S. economic data continues to point to broad based weakness, there have been some signs of improvement in the credit markets. It is against this backdrop that the Federal Reserve recently delivered a 25 basis point rate cut on April 30, lowering the fed funds rate to 2.0%. The economic assessment was not quite as bad as feared. According to the Fed’s last monetary policy statement, there is still a good deal of softness in the U.S. economy, with household and business spending remaining “subdued.” In addition, labour markets “have softened further.” Moreover, the Fed mentioned that “financial markets remain under considerable stress,” which comes as little surprise. The housing contraction is also presumed to remain a drag on economic growth going forward. But the Fed was not nearly as clear as in the past about its intentions for the future. By leaving out the statement regarding downside risk to the economy, the Fed effectively created a neutral bias.
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[B][B][B][B][B] Will Corporate Defaults in the UK Rise as Much as Feared? [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
In the Q1 2008 Bank of England Credit Conditions Survey (CCS), there was a jump in lenders’ expectations that default rates on loans would rise sharply, see chart a. The chart highlights that there was a greater number of respondents expecting defaults to increase in Q2 than in Q1, which in turn was much worse than in Q4 2007. This is the main reason there was a rise in the cost of lending, to companies and households, to compensate for the higher risk of defaults. It was also one of the reasons why there was a further tightening of credit criteria before a loan is made and a cutting back of the supply of loans being made available. How likely are these fears about defaults to be realised? The evidence from UK insolvencies in Q1 was rather more reassuring than that suggested by the expectation of lenders in the CCS and also implied by corporate credit spreads, see chart b. This chart shows that the spread of lending to UK companies over safer government bonds implies a sharp rise in corporate failure rates, at least back to the long run average of around 1.4% of companies on the active register against the current failure rate of 0.6%.
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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.