[B]Weekly Bank Research Center 7-16-07[/B]
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[B] Review and Previes: US Fed’s Bernanke’s Speech Critical to Capital Markets
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
Treasuries posted sizable intermediate-led gains over the past week that reversed about half of the prior week?s sharp sell-off. The sell-off occurred after a huge flight-to-safety rally on Tuesday and into early Wednesday, as mortgage, credit and loan markets seemed to be imploding, was partly reversed over the rest of the week as risk markets rebounded and stocks surged. It was a light week for economic data, but the key release ? retail sales ? was considerably weaker than expected, particularly after better-than-expected chain store reports on Thursday had helped spark the stock market?s spike higher, helping Treasuries post small gains on Friday that halted the flight-to-safety reversal losses of the prior couple days. The downside in the retail sales report led us to cut our 2Q consumption forecast to +1.3% from +1.7%. In addition, translation of the 2Q federal government budget results, which were completed with the release of a better-than-expected June budget surplus (prompting us to cut our FY2007 budget deficit forecast to US$165 billion from US$170 billion), led us to cut our 2Q federal government spending estimate to +0.5% from +4.0%. These negatives were only partly offset by a better-than-expected trade balance report and upside in business inventories, causing us to trim our 2Q GDP forecast to +3.6% from +3.8%. Although there was a net dovish move in Fed pricing in the futures markets over the course of the week after a much bigger move through Tuesday was only partly reversed, the market still came out of the week priced for a Fed on hold indefinitely.
Full Story
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[B] US Dollar Under Pressure
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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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During the week the EUR hit its highest level since it was launched. It was not an all-time high if we include the old DEM, but it was still close to the peak back in 1995. So was this a sign of European strength or American weakness? Well, mostly the former. The US economy has slowed, but the latest data show that it is back in a relatively high gear (see section on the US). The US economy has proved rather robust to the weakness in the housing market, and the outlook for H2 is actually quite bright. But Europe simply contin-ues to look better, with the most momentum it has had since 2000, and the ECB is continuing to tell the mar-ket that interest rates need to rise further. We still reckon that the ECB will enter 2008 at 4.75%.
[Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus13072007/$file/WeeklyFocus.pdf)
[B] [B][B][B] [B] US: After the 2nd Quarter Bounce Look for Growth to Cool
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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
Our forecast has not changed materially over the past month. We were looking for second quarter real GDP growth to be 3.5 percent then and we still expect a gain of that magnitude. Beneath the surface, however, the tone has changed slightly. The second quarter appears to have ended on a soft note, particularly consumer spending. Home sales and new construction also likely weakened a bit further in June, as mortgage rates spiked last month. We have slightly reduced our growth estimate for the second half of the year and the risks are to the downside. Interpreting the monthly data releases will take a little more patience and diligence. Most of the data covering the consumer and housing will likely remain weak. Real after-tax income declined slightly during the second quarter, as wages and salaries had difficulty keeping pace with soaring gasoline prices and higher taxes. Prices are also rising a bit more at the grocery store, leaving consumers with less money to spend on everything else.
Full Story
[B] [B][B][B] [B] UK Interest Rates Scenarios Show Threat to the Economy
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Earlier in the year when it was apparent to us that UK interest rates would get close to 6%, we ran a series of scenarios to gauge what the impact of rates at these levels and higher would do to economic growth. With base rates currently at 5.75% and the financial markets expecting them to reach 6%, and possibly 6.25% before the end of the year, we thought it might be instructive to repeat the exercise. The results of a scenario of 6.25% base rates by the end of September and one of 6.75% by the end of December 2007 compared with our base case of rates peaking at 5.75% and falling in 2008 are shown in the charts.
[B] [B][B][B] [B] Canadian Inflation Bigger Threat than Manufacturing Slowdown
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Let the conspiracy theories begin. The Bank of Canada increased their targeted interest rate by a quarter of a point this week to 4.50%. While the change was largely telegraphed well ahead of time, it does come at a time when not every sector of the Canadian economy is firing on all cylinders. In particular, Canadian manufacturing has not had a stellar performance over the last year, as weaker U.S. demand and the elevated loonie have continued to increase the obstacles for the sector to overcome. But the Bank of Canada - in fact any central bank - must look at the economy as a whole. Monetary policy is not an effective tool for targeting specific sectors. And as a whole, the Canadian economy has been stronger than expected. Moreover, policymakers are not ignoring the woes of Canadian manufacturers or the health of the economy, nor are higher interest rates part of any dastardly plan. Quite the contrary, history shows that high and persistent inflation is the biggest threat to the Canadian economy and Canadian competitiveness abroad.
[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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