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Bank Research Consensus Weekly 08.23.10

Source: http://www.dailyfx.com/forex/fundamental/bank_research/2010/08/16/Bank__Research_Consensus_Weekly_08.16.10.html?utm_source=twitterfeed&utm_medium=twitter

Monday, 16 August 2010 17:19 GMT

By Michael Wright, Currency Analyst


There's no mistaking the slowing in incoming US economic indicators, ranging from past consumer spending and income to employment and forward-looking orders. And we are mindful of the downside risks to growth, noted below. But extrapolating the recent deceleration in the economy into still-slower growth would be a mistake, in our view. Instead, we see a moderate pickup ahead, with the 2Q downshift marking the transition to a period of unspectacular 3-3.5% growth.

Richard Berner & David Greenlaw, Global Economics Team, Morgan Stanley
Bank__Research_Consensus_Weekly_08.16.10_body_bankresearch.jpg, Bank Research Consensus Weekly 08.23.10

Growth Pickup Coming, But Fed Exit Postponed

Richard Berner & David Greenlaw, Global Economics Team, Morgan Stanley

Don't extrapolate slower growth. There's no mistaking the slowing in incoming US economic indicators, ranging from past consumer spending and income to employment and forward-looking orders. And we are mindful of the downside risks to growth, noted below. But extrapolating the recent deceleration in the economy into still-slower growth would be a mistake, in our view. Instead, we see a moderate pickup ahead, with the 2Q downshift marking the transition to a period of unspectacular 3-3.5% growth.

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FX: USD Recovers Despite Soft Fed

Arne Lohmann Rasmussen, Senior Analyst, Danske Bank

Last week the Fed announced it would be re-investing principal payments from its Agency and Mortgage Backed Securities in longer-term Treasuries and thereby keep its balance sheet constant. It effectively puts the exit process from quantitative easing on hold for now.

The knee-jerk reaction was a weakening of the dollar against the euro and the yen. The new stimuli from the Fed will further add to dollar liquidity in the market and will everything equal push US rates lower. The move underlines that the Fed has a strong commitment to keep rates low for an ‘extended period’. However, the dollar quickly reversed the losses and we saw a significant drop in EUR/USD from 1.33 to below 1.28.

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United States – Deflation on the Brain But Probably Not on the Horizon

James Marple, Economist, TD Bank Financial Group

It was another volatile week for financial markets as a dovish sounding Fed came up against disappointing economic indicators that, once again, raised fears about the sustainability of the U.S. economic recovery. By the time of writing, equity markets were down over 3.0% from their previous week’s close and the yield on U.S. 10 year treasuries had fallen 0.1 percentage points - reachings its lowest level since March of 2009. With the economic recovery slowing, and the job market showing little signs of joining in what economic recovery there is, the deflation boogeyman is once again popping up and keeping investors from a good night’s sleep. We have written in the past about the risks of deflation (see U.S. Consumer Prices to Drift Awefully Close To Deflationary Danger Zone). Given the turn in economic indicators, and in light of the move by the Federal Reserve to take baby steps towards more, rather than less, monetary stimulus, it is worth considering these risks again.

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BOE Inflation Report: King to Have Last Word, Not Sentance

Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets

Nine months into a cyclical recovery and the debate over UK monetary policy has become increasingly finely balanced. On the one hand, the pick-up in growth and the elevated level of inflation have strengthened the case for a preemptive rise in interest rates to start soon. On the other, the degree of uncertainty about the durability of the recovery and the potential disinflationary forces that could yet emerge have raised the possibility that more, not less, stimulus may be required. So which is it - should sterling markets brace themselves for an impending rise in interest rates; or should they be prepared for a renewed round of policy stimulus to stave off the risk of a double-dip recession?

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Compiled by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical's, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast
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