Slower growth and weak job market provide the basis for expectations that the Fed will ease 50 bp at the March 18 meeting. For growth, we expect continued weakness in residential investment and inventories. Meanwhile, growth in non-residential investment and equipment spending will be slower during the first half of 2008 than we have seen over the last three years. Export and consumer growth remain positive and limit the extent of the recession downturn. However, the driving factor for investors and the Fed remains the employment outlook. Declines in employment over the last two months suggest that the economy remains the driving factor influencing monetary policy and therefore a bias to ease going forward.
[I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
[B]Weekly Bank Research Center 03-10-08
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[B][B][B][B][B] Cracking the Eurozone Credit Puzzle [/B][/B][/B][/B][/B]
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[I] Stephen Roach, Head Economist, Morgan Stanley [/I]
Rather puzzlingly, we have seen little evidence so far of a sharp fall in bank lending to the private non-financial sector. This could potentially change in the future. We suggest several ways to trace credit availability and discuss the factors that are pertinent in this context. We look at fundamental factors such as spending, inflation and interest rates, which typically drive credit demand. But, we also look at other data sets, which hold precious clues, and discuss the role of the ECB’s open market operations and its collateral rules for bank funding. As signs of a significant impairment of loan supply have yet to materialise in the macroeconomic data, we still believe that the ECB will keep rates on hold. However, if signs of a marked shift in credit availability on the back of the current credit market dislocations were to emerge, which would imply significant downside risks to the growth outlook, this could pave the way for ECB easing in late 2008 or early 2009, in our opinion.
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[B] ECB Concerns Rising-Both on Inflation and Growth [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
As expected ECB kept rates unchanged at 4% on Thursday. ECB continues to stress the upside risks to price stability but at the same time points to downside risks to growth. The staff projections also reflected this as the inflation projection was revised markedly higher to 2.9% in 2008 and interestingly to 2.1% for 2009 . so above the inflation objective even next year. This is based on assumptions that forward rates follow market expecta-tions in mid-February when markets were pricing 100bp of cuts over the next year. Euroland growth was revised lower to 1.7% in 2007 and 1.8% in 2008 and risks are still stressed to be on the downside. So concerns are go-ing up regarding both inflation and growth. Trichet increasingly refers to the euro and the strong dollar policy of US indicating some anxiety over the strengthening of the euro. This is revealing its increasing growth concerns as ECB should actually welcome a stronger euro from a pure inflation point of view. ECB wants to keep flexibility due to the very high uncertainty and does not want to send clear signals in any direction. In the Q&A Trichet stressed that it will not underwrite market expectations but added that it never does. We think ECB still overestimates the growth outlook and will cut rates eventually. Our base case is that the first cut will come in June, but it will depend on how fast growth slows down and the risk is skewed to a later cut.
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[B] Fundamentals Dictate Fed Ease Today: Problems Later [/B]
[/B] [/B] [/B] [I] E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Slower growth and weak job market provide the basis for expectations that the Fed will ease 50 bp at the March 18 meeting. For growth, we expect continued weakness in residential investment and inventories. Meanwhile, growth in non-residential investment and equipment spending will be slower during the first half of 2008 than we have seen over the last three years. Export and consumer growth remain positive and limit the extent of the recession downturn. However, the driving factor for investors and the Fed remains the employment outlook. Declines in employment over the last two months suggest that the economy remains the driving factor influencing monetary policy and therefore a bias to ease going forward.
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[B][B][B][B][B] Bank of Canada Likely to Go 50 Again [/B][/B][/B][/B][/B]
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[I] Steve Chan, Economist, TD Bank Financial Group [/I]
Putting it all together, while the brisk job growth will not be lost on the Bank of Canada, we still feel that another aggressive half-point rate cut will be in the offing at the central bank’s next fixed announcement date in April. By then, it will remain clear that the U.S. problems are not getting better, that the slowdown in Canada continues to broaden to the services side, and that Canada’s overall economy will be hard pressed to record growth in the first quarter. Soft core inflation trends also provide credence to our call. Lastly – and importantly – we assume that the March reading on employment will better reflect the softening underlying momentum in the Canadian economy.
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[B][B][B][B][B] Will Global Growth Continue Without the US? [/B][/B][/B][/B][/B]
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[I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Global economic growth last year was 4.7%, maintaining the extremely strong pace of the last four years. The main impetus for that growth came from the emerging markets. Growth in the US was just 2.2% and 2% in Japan, the first and second largest economies in the world, respectively. With consensus forecasts for 2008 suggesting that these two economies will expand at an even slower pace, 1.6% in the US and 1.4% for Japan, the question is what will happen to global growth? One worry has been that, with the US skirting recession, will the world economy experience recessionary conditions as well? Our view is that the world economy will be able to absorb the slowdown of the US, and a number of other developed economies, including the UK. There will be a slowdown in the global economy, but growth should still be a respectable 4.3% because of the strength of emerging market growth. What has changed to make emerging market growth so stable and less dependent on the US?
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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]
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