North American Bond Yields Steal Headlines

Weekly Bank Research Center 6-11-07


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Are Financial Conditions Turning Restrictive?
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Stephen Roach, Head Economist, Morgan Stanley

                                                                                                                                                      The recent backup in US interest rates and the very recent selloff in equities                 are making financial conditions less supportive of growth, especially for                      credit-sensitive areas like housing.  Judging by 10-year TIPS rates, real yields               have risen some 50 basis points (bp) since the beginning of May, to a level                    rivaling their cycle high in June 2006.  More ominously, in just the past 24                   hours, a jump in the inflation component has added another 15 bp to nominal US                 yields.  US and global equity markets, which rallied 11-14% after the correction               in March, have declined 2-4% over the past week and our strategists believe                    there is more to come.  For example, our European team?s tactical indicators are               all now flashing yellow.  That?s happened five times since 1980, and produced an               average decline in prices of 15% over the following six months (see Teun                       Draaisma, "A Full House Sell Signal - We Stay Neutral Equities," June 4, 2007).                                                                                                               ?
                                                                                                                                                                                               [Full Story](http://www.morganstanley.com/views/gef/index.html#anchor5009)
                                                                                                                                                            

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Economic News That’s So Good, It’s Bad
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John E. Silvia, Ph.D. Chief Economist, Wachovia
This was one of those crazy weeks on Wall Street where good news on the economy was bad news for the stock market. Share prices had a rough week, with the Dow Industrials and S&P 500 down 2.3 percent through mid-day Friday. The trigger was the solid run of strong economic news over the past couple of weeks, which has made it abundantly clear that the Federal Reserve will not need to cut interest rates this year. Many of the Wall Street banks that had been counting on a rate cut, or several rate cuts, took them out of their forecast this week. Our own forecast has had the Fed on hold through the end of this year and we have not changed that view. We do believe that the next Fed move will be to raise interest rates, but such a decision is still many months, and possibly even a year away. So why is Wall Street in such a rut?
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Full Story

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ECB Headed for Further Hikes
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Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

                                                                                                                                                      As expected, the ECB raised its policy rate to 4.0% on Wednesday. The subsequent               press release was largely free of surprises, and the changes that were made were               something of a mixed bag. While yields fell slightly on Wednesday, they bounced                back quickly on Thursday, which is consistent with the ECB not sig-nificantly                  revising its rhetoric. Pulling in a dovish direction is the ECB.s growing                      conviction that its interest rate hikes are impacting on credit growth, which is               beginning to ease. It is also more confident about getting the housing markets                 to stabilise. Finally the ECB signalled that it would be monitoring prices                     .closely. rather than .very closely. or .with strong vigilance., which normally                signals that we are approaching an interest rate hike. Pulling in a hawkish                    direction, the ECB thinks that growth will continue to surprise on the upside                  and it sees more up-side risks to inflation than before. All in all, these                     comments support our view that the ECB will raise inter-est rates further. We                  anticipate three further hikes to 4.75%. Significant data are thin on the ground               in the coming week. Various figures for industrial output are due out and final                consumer price data for Euroland in May. The ECB meeting will be followed up by                ECB.s monthly bulletin, but this is unlikely to attract much attention.                                                                                                                       
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                                                                                                                                                                                               [Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus08062007/$file/WeeklyFocus.pdf)
                                                             
                                   
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Just a Month Away from Likely Bank of Canada Rate Hike
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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group

                                                                                                                                                      It is hard to say developments in the Canadian labour market in May disappointed               when the unemployment rate remains at a generational low of 6.1 per cent, but                  the figures were less than expected. After losing 5k net jobs in April, the                    economy added just 9.3k net new jobs last month. But quite honestly, the pace of               job creation in Canada in the first quarter, which averaged over 50k new jobs                  each month, was not sustainable and we are simply seeing some balancing out. In                addition, the housing market showed some unexpected strength last month with                   housing starts up 8.4 per cent over April. Topping out the Canadian releases                   this morning was a report that the trade surplus is now at its widest point in                 nearly three years. Although exports fell marginally, much of the improvement                  came as the result of a sharp drop in imports. The Canadian dollar was able to                 briefly dip below 94 cents on the news, but this was very short-lived.                                                                                                                        
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                                                                                                                                                                                               [Full Story](http://www.td.com/economics/weekly/jun807.pdf)
                                                             
                                   
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