Weekly Bank Research Center 6-4-07
Weak Dollar Boosts US Corporate Profitability
Stephen Roach, Head Economist, Morgan Stanley
In the immortal words of the baseball sage, it?s like déjà vu all over again: Another spring is here, and for the third straight year, another surge in gasoline prices is underway. From a low of $1.60/gallon in January, wholesale quotes have jumped 40% to $2.25/gallon. The culprits: Strong US and global demand and seasonal supply shocks. US pump prices (an average of all grades) soared by 36% to $3/gallon and now seem likely to linger at that level for a while. Shocks to the gasoline supply chain could push them higher still. Will the resulting drain on wherewithal be the last straw for the much-maligned US consumer? And will the price runup rekindle inflation expectations, keeping the Fed on alert?
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[B] [B][B][B] [B] US Economy: Even Better than a Goldilocks?
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[/B] [/B] John E. Silvia, Ph.D. Chief Economist, Wachovia
In a week that first quarter real GDP growth was revised down to a anemic 0.6 percent, it might seem a little odd to bring up the prospect of economic conditions returning to a pace that rivals or surpasses the Goldilocks era of the mid- to late- 1990s. But that is precisely where we believe the economy is today. The first quarter’s woes are behind us, and activity is reaccelerating in a way that should give us stronger growth and lower inflation. We now expect second quarter real GDP to expand at a 3.5% pace and look for growth in the second half of the year to be in the 3% range. The drivers for a rebound are resurgence in business investment and a modest rebound in inventories. Consumer spending should also hold up well, although outlays will rise at just half the first quarter pace. This week’s economic reports provide ample support for our forecast. Real GDP was revised down slightly more than expected, as a larger trade deficit and larger drawdown in inventories sliced 0.7 percentage points off the initial estimate. Final demand, however, as measured by final sales to domestic purchases, rose at a solid 3.5% pace.
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ECB: Rate Hike to 4.0% and More in Store
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[/B] [/B] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The big event of the coming week is the meeting of the ECB;s governing council. Everyone expects it to raise the ECB’s policy rate to 4.0%, so the big question is what signals Jean-Claude Trichet will send out at the subsequent press conference. The prepared text will probably be revised slightly to soften the tone, as most indications are that the ECB is no longer pursuing an expansionary monetary policy. Meanwhile, two members of the governing council have recently said that the ECB may give up using “code words” to signal future monetary policy and instead make its economic and monetary analysis more detailed and extensive. There is therefore a risk of major restructuring of the way that the ECB communicates, but this does not necessarily mean that the bank is finished with raising interest rates. In our view, there is much to suggest that the ECB is still considering further hikes, not least with growth being as strong as it is right now. We have therefore revised our forecast, such that we now anticipate a 25bp hike not only in September but also in December and again in March next year, which means that we now expect the ECB to peak at 4.75% rather than 4.5%.
[B] [B][B][B] [B] Canadian Economy in State of Excess Demand
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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group
The economic indicators leading up to the Bank of Canada?s fixed announcement date (FAD) on May 29th pointed to escalating inflation risks in Canada. The economy was already operating at full capacity heading into 2007, as reflected by the high employment-to-population ratio and the closed output gap. Then, the data prior to Tuesday?s Bank announcement suggested that real GDP in Q1 rose at an annualized pace well above the generally accepted non-inflationary trend rate of 2.8%, with the latter being an optimistic assessment given Canada?s dismal productivity performance. Two days, later Statistics Canada reported that economic growth in Q1 was 3.7%, confirming that the economy was operating in a state of excess demand that poses a clear danger to price stability. With core inflation already running above the Bank?s 2% target, and accelerating away from it based on the rise to 2.5% in April, there should have been little surprise that the central bank set the stage for a future tightening of policy by stating that “some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.”
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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