[B]Weekly Bank Research Center 7-30-07[/B]
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[B] Repricing Risk: Phase II
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
The repricing of risk in financial markets has moved into a new phase, spreading to all asset classes on a global basis. Credit, loan, and mortgage markets have continued their month-long plunge, with spreads widening to two-year highs and lenders clearly becoming more circumspect. More recently, the carnage extended to global equity markets and promoted a massive flight-to-quality bond-market rally. Small wonder: Fears rose that tighter financial conditions would hurt the economy, and increased financial-market volatility heightened uncertainty. The reversal in performance of stocks and bonds in the past 2-3 weeks has quickly unwound roughly two-thirds of developed-market equity returns and an even larger fraction of the rise in risk-free yields since the beginning of 2007.
Full Story
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[B] ECB On Hold in August
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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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The ECB rate meeting on Thursday will dominate a busy week in Euroland. However, the meeting will be in the form of a teleconference and without the usual press conference to follow. Further, given that there was not much change in the communication that followed the last Governing Council meeting, there is nothing to suggest a change in rates at the August meeting. Like consensus, we expect the ECB will keep rates un-changed at 4.0%. As there will be no press conference, there will be no chance for the Council to send new signals to the market. Instead, it may use the opportunity afforded by the publication of the monthly report on 9 August, which would give reason to read this report rather closely. Our forecast is still that the ECB will raise rates to 4.25% at the September meeting and ultimately to 4.75% after hikes in December and March.
[Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus27072007/$file/WeeklyFocus.pdf)
[B] [B][B][B] [B] BoE and ECB to Keep Interest Rates on Hold
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Large swings in global financial markets have a tradition of weighing on interest rate deliberations of central banks - so last week’s events will certainly be taken into consideration when the Bank of England and the European Central Bank discuss their respective levels of interest rates on Thursday. In the UK, figures last week from the CBI on industrial trends and the Nationwide on house prices went some way to underscore our view that the UK economy is already responding to the sequence of previous interest rate increases (and the strength of sterling). This week’s data may offer more indications supporting our view that base rates have already peaked. Consumer confidence is due on Tuesday and is forecast to show a fall in July related to higher mortgage rates and concerns about employment. This is consistent with the results of our own LTSB July consumer barometer. The CBI distributive trades survey will also be published on Tuesday and may show a drop in reported retail sales in July. Several retailers have reported mixed business conditions in recent weeks, but without generalising for the entire sector, this could be an early sign that interest rate rises are squeezing disposable income and discretionary spending. The July manufacturing PMI survey is due on Wednesday and is forecast to show a drop to 53.8 from 54.3 in June as a result of slower growth in new orders. Output prices may offer some indication about future levels of output price inflation. The services PMI is due on Friday and we expect to see a moderation in activity, with the headline index edging down to 57.4 in July from 57.7 in June.
[B] [B][B][B] [B] U.S. Housing Market Still on the Mend
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
The U.S. housing market makes up only 5% of the total U.S. economy, and the much-ballyhooed subprime sector - lending to those with less than perfect credit - makes up only a tenth of the housing market, or one-half of one per cent of the U.S. economy. As such, neither on its own can drag down the U.S. economy. Highlighting this, U.S. GDP expanded by an above-expected 3.4% in the second quarter of 2007, in spite of the further contraction in residential investment of 9.2% over the previous quarter - the third straight quarter that the rate of contraction has improved. One concern is the slowdown in consumer spending, from 3.7% to 1.3%. While the U.S. consumer accounts for nearly 15% of global growth and will be closely watched to see how this spreads but, up until this point, U.S. consumer spending has been supported by low unemployment and proven stronger than conditions warranted so some natural correction was overdue. Increasing defaults of homebuyers, too, will require rising interest rates or a significant increase in unemployment - neither of which is expected. In fact, as can be seen in the attached chart, the current level of interest rates suggests the rise in overall delinquencies may be limited.
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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[/B] [/B] [I] J-Chart [/I]
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