What Will the Credit Crunch do to Macroeconomies? Debate Rages on Across Research Des

[B]Weekly Bank Research Center 9-10-07[/B]


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[B] Downside Growth Risks Become Reality
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]

Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Three weeks ago, we thought that the just-emerging liquidity squeeze threatened to produce weaker global growth, lower inflation, and central bank action to counter the credit shock (see “After the Shock: Risks to the Global Economy and Markets,” Global Economic Forum, August 20, 2007). That was then. Now it?s clear that this risk scenario, at least for the US economy, has become the baseline. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. And there?s no denying the downside risks: Tighter financial conditions will squeeze consumer and business capital spending, add to business caution, and limit gains in inventories and hiring.
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                                          [B]                                                                                                                                                                          Euroland: Financial storm so far bypassing the macro economy                                                                                                                                                                                 

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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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                                                                                                                                                                                                                                                   Most of the August business confidence indicators out in the past week held  steady or fell just a little despite the fact that the data on which they were  based were collected in the third week of August, when the storm on the  financial markets was at its height. Further, what did pull some indicators down  was primarily centred on expectations. It seems remarkable that, so far, the  turmoil on the financial markets has not really had any effect on the economic  indicators, though there is of course a risk that the impact will become  clearer in the coming months.                                                                                                                          

                                                                                                                                                                              
                                                                                                                                                                                                                       [Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus07092007/$file/WeeklyFocus.pdf)
                                                                     
                                           
                                                                                                                                                                                                                                                                                                                                                                            [B] [B][B][B] [B]  Bank of Canada signals a pause next Wednesday  

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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
The burning economic questions continue to be: To what extent will the recent disruption in financial markets filter into the rest of the U.S. economy? Will the impact spread into the Canadian and broader global economy? And, how should central banks respond in the face of such an ominous - albeit uncertain - increase to the downside risks?

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                         [B] [B][B][B] [B]  Sanity Returns to Financial Markets  

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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]

This morning?s surprising drop in nonfarm employment reinforces some of the worst fears about the economy and potential for further trouble in the subprime mortgage markets and housing. Nonfarm employment declined by 4,000 jobs in August, and data for the previous two months erased 81,000 jobs. While special circumstances explain a sizeable part of the jobs shortfall, there is no question the economy is losing momentum and that the weakness in housing and motor vehicles is spreading to other parts of the economy. Nearly half of the downward adjustment in employment came from the government sector. Apparently the BLS is having difficulty measuring public school employment around the end of the school year. If jobs are being undercounted, as we suspect, then we should see a reversal in coming months.
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              [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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