Our call for a weaker dollar rests on three ideas. First, we expect the US economy to continue to be the source of dollar weakness in the coming months. Second, the present financial crisis has as its epicentre US financial institutions and US financial products. Thirdly, the dollar is under pressure from a structural change in the management of central bank reserves and sovereign wealth funds.
[B]Weekly Bank Research Center 12-03-07[/B]
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[B][B][B][B][B] US Enters Corporate Earnings Recession [/B][/B][/B][/B][/B]
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[I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
It’s official: An earnings recession is now underway. That’s true whether the metric is S&P 500 operating earnings or corporate profits that economists project. Measured by the S&P 500, our strategy team estimates that earnings per share declined by 2.8% in the third quarter compared with a year ago. And while statisticians estimate that the broader gauge in the US National Income and Product Accounts (NIPAs) rose by 2.7% over the same period, there are clear signs of deterioration pointing to weaker future results. Indeed, I think a squeeze on profit margins and slower volumes are doubly crushing earnings growth. Wall Street analysts have begun to get the message: As recently as November 2, the consensus forecast for fourth quarter S&P 500 operating earnings was for a gain of 8.4%. My colleague Bill Smith calculates that the consensus now predicts a gain of 2.2% in the fourth quarter. And the team’s S&P 500 earnings revision factors signal further downward movement over the next several weeks.
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[B] Will the decline of USD become disorderly? [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
Our call for a weaker dollar rests on three ideas. First, we expect the US economy to continue to be the source of dollar weakness in the coming months. The housing recession, where no end is in sight, is joined by an adverse impact on consumption from rising energy prices, as well as a restriction of credit. To counter that we now expect the Fed to cut rates by another 75bp, with the first instalment due in December. Second, the present financial crisis has as its epicentre US financial institutions and US financial products. We are concerned that Europe may increasingly be subject to a risk premium, but until this happens the dollar is mostly at risk. Thirdly, the dollar is under pressure from a structural change in the management of central bank reserves and sovereign wealth funds. While we believe that the near-death of USD as a reserve currency has been greatly exaggerated, we do find signs of a structural headwind against the dollar. Further, US rate cuts and rising inflationary pressures in Asia and the Middle East are making life harder for dollar peggers to the point where a change in GCC dollar pegs as well as an accelerated rise in CNY could be underway.
<strong style=""> [B][B][B] [B] The UK Housing Market is Slowing - Don’t Panic? [/B]
[/B] [/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
In his opening statement to the Treasury Select Committee, Mervyn King, Governor of the Bank of England, stated that the consequences of tighter credit conditions resulting from the turmoil in global financial markets are ‘difficult to assess and are likely to be evident first in the housing and commercial property markets’. This point seems to have elicited a strong response from observers. Lance Corporal Jack Jones, in the hit comedy, Dads Army, was famous for his catchphrase, “don’t panic, don’t panic”, as he ran around panicking. This almost appears to be the general reaction to a series of weaker data from the housing market in the last week. But should we panic?
<strong style=""> [B][B][B] [B] Bank of Canada to Cut Interest Rates, but Timing is a Matter of Debate [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
In our opinion, this provides the Bank of Canada with the flexibility to ease monetary policy modestly by 50 basis points. The key question is the timing. Today’s strong GDP numbers make the December 4th annoucement a very close call, but since the Bank is forward looking and knows that changes in monetary policy are only felt with a lag of 12-18 months, the odds still favour a quarter point rate reduction next week. If the Bank does not act next week, there is a good chance that it will acknowledge that the downside risks have increased. By doing so, the Bank would keep financial market expectations for future rate cuts alive and limit any rebound in the Canadian dollar that would come from an unwinding of the 50 basis points of easing that is currently priced into markets for 2008.
<strong style=""> [B][B][B] [B] US Inflation is Heating Up [/B]
[/B] [/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
There is an old saying on Wall Street that the Bears have Thanksgiving and the Bulls get Christmas. Thus far, this year is no exception. The stock market has rallied back from almost the instant the Dow Jones Industrial Average reached a 10 percent pullback. A few good words from the Federal Reserve, particularly Donald Kohn, helped fuel the rebound. The message from the Fed is essentially that they now believe the dysfunctional credit markets present more risk to the economy and the financial system than anything found in the economic or inflation statistics. For the time being, the Fed will focus on righting the financial markets and making sure there is enough stimulus in place to offset the tightening in credit markets and ongoing unraveling of the housing market. A quarter point rate cut at the Dec. 11 FOMC meeting seems certain and markets are beginning to incorporate an even larger move. After reading through Donald Kohn’s and Ben Bernanke’s remarks, we too believe a half point cut is possible but are sticking with a quarter point reduction for now.
<strong style=""> [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
[/B] [/B] [/B] [I] J-Chart [/I]
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