US Fed to Cut Rates? Not this Month

[B]Weekly Bank Research Center 10-15-07[/B]


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[B] Fed to Pause in October [/B]
[/B] [/B] [/B]</p> [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
The combination of healing in stressed financial markets and mixed economic news gives the Fed latitude to pause before easing monetary policy again. Since the Fed eased on September 18, the improvement in most markets has been dramatic, although incomplete. As the Fed intended, that improvement has partially offset the financial restraint from the summer liquidity squeeze. As for economic indicators, coincident or lagging indicators have shown resilience, but forward- looking data point to sluggish growth. Correspondingly, while economic activity in the third quarter seems likely to have run at a respectable 2½-3% pace, indicating that the economy can withstand tighter financial conditions, growth in coming quarters is still poised to slow to 1½ to 2%. Moreover, with slack in the economy increasing, we still believe that inflation will drift lower. Despite the October pause, therefore, the Fed has more work to do, reflecting downside risks to growth and a tame inflation backdrop.
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[B] Dollar’s decline = Europe’s death? [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
At the time of writing, the dollar is again under pressure and on course to test record lows. We expect it to keep weakening in the time ahead, and EUR/USD might soon touch levels near 144. How hard and when will Europe be hit by the dollar’s weakness? The answer is that the shock to the European economy will depend first of all on the speed of change in the dollar’s value and only to a lesser extent on the dollar.s actual value, as the economy ‘adjusts to’ a new currency level over time. Equally important, it is the broad, trade-weighted EUR that is decisive. This measure has moved somewhat less than EUR/USD over the last couple of years, and the move has not been dramatically fast in a historical perspective. To top it all, the global growth environment is still generally strong. That is why the dollar’s weakening has impacted far less on the European economy this time around than in 2003-2004.

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<strong style=""> [B][B][B] [B] Interest rate market review - bonds, cash and swaps [/B]
[/B] [/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Growing doubts that the Fed will lower interest rates again at the end of the month led to a global rise in shortdated bond yields this week and resulted in a flattening of the yield curve. The biggest swing took place in the UK where a speech by BoE governor King forced some participants to revise their forecast that base rates would soon be cut. Stronger than expected economic data also weighed on gilts. UK 2yr yields rose 20bps this week to 5.29%, out performing the US and the euro zone where yields rose 9bps and 18bps, respectively.

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<strong style=""> [B][B][B] [B] US Monthly Outlook: Federal Reseve Done for Now [/B]
[/B] [/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
The worst fears about the near term economic outlook subsided considerably following the release of the September employment figures. Not only were job gains stronger than expected in September but the previous month’s surprising decline was revised away. The meltdown in the financial markets has also cooled off. While credit spreads remain wider than they were prior to the crisis, they have come off their highs significantly. One of the more pressing problems today is that the secondary market for subprime mortgages remains largely closed and there is still too little liquidity in the jumbo mortgage market. High quality leveraged loans and asset backed commercial paper are trading, but at a discount; anything below high quality is trading relatively little or not at all. As a result, banks have put more of these assets on their books, as well as a significant number of residential and commercial mortgages that had been slated for the secondary market. With balance sheets filling up with riskier assets, many banks are curbing their appetite for anything less than pristine credits.

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<strong style=""> [B][B][B] [B] U.S. and Canadian trade balances improve: Déjà vu much? [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
There are some economies in the world that never seem to lose an opportunity to lose an opportunity. In good times, GDP growth could be stronger and when times get tough, they seem to be the first to hit the mat. Rarely is the U.S. economy one of these under-performers. Over the last 15 years, only once has economic growth in the U.S. been less than the average for the other 29 other most industrialized nations. Through the tech bust, through the East Asian and emerging market financial crises, through the recovery from the early-1990’s recession, U.S. growth has been resilient. And now that the U.S. economy seems likely to continue to expand at just a moderate 2% pace over the next year, some boo-birds would have us believe the end is nigh. But at the same time, many of these same worry-warts have been complaining for years about the need for the U.S. to address its mounting trade imbalance. You can’t have it both ways.

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<strong style=""> [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
[/B] [/B] [/B] [I] J-Chart [/I]
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