How Things Look:
US Housing: There have been reports this week of new lines of credit being made available to sub prime lenders, Freddie Mac throwng about $20B into the sub prime pot and investors like Carl Ichan looking to buy.
What we are seeing here is the willingness of gov't and investors to further fund the system with credit. This will allow for the the continuation of the favorable rates and payment levels in the loans that have already been made. With the job market going well it's likely that these borrowers will continue to make their payments at their present levels. What this means is that the housing crisis in the sub prime sector will be contained, the problem is not likely to get worse and there will be no spill over or contagion to other parts of the economy.
Don't listen to me though, listen to Hank Paulson (sub prime contained) and Carl Ichan (buying real estate). Eventually, everyone else will.
Fed: With the sub prime problem largely contained and controlled, the economy is set to rebound in Q3 and Q4 just as the Fed has been predicting all along. While the core CPI has been trending down, the latest core PCE shows inflation still trending up. It will take months of flattening followed by downtrending before the Fed shifts to a neutral bias; rates will not be cut this year and if the core PCE continues to trend up with a growing GDP, look for an increase late in the year.
The $: There is still plenty of pressure on the $ as markets see a Fed cut and slower economic growth (they are wrong, but price won't reflect that yet). There could be a temporary boost vs the GBP if UK GDP prints lower then consensus, which is very likely. Further $ pressure will be seen towards the end of the week as the focus shifts towards US GDP. A print there at or worse then consensus followed by a lower print in the core PCE (no prediction there at this time) further intensifies the negative $ sentiments.
BoE: Will be moving to 5.5% at the next meeting and that will be all. UK inflation is projected by the bank to be trending down afterwards so a 2nd increase will likely not be needed. These are the BoE's own projections and the current thinking of the NIESR mirrors this.
ECB: Another increase highly likely at the next meeting. We'll see how it goes beyond that as EU expansion figures to slow somewhat after the recent rate increases. The ECB focuses heavily on M3; continued expansion there can prompt them to raise rates even if inflation looks good.
BoJ: At least one more increase is all but certain this year and there is a possiblily the Japanese economic expansion will allow two. The bank is on a course to normalize rates at a "gradual" pace that will be dictated by the data. There's a slew a data scheduled for release on Thursday with the industrial production number figuring to be the most important indicator of future BoJ moves.
World Economy: Looks to be in the 4-5% range for the year with China leading the way and the US at the bottom of the curve (but trending up as the year closes). The next increases from the BoE and ECB are likely to slow their expansions somewhat towards the last quarter. Japan looks to have the highest rate of growth in the G7 this year which makes sense because their monetary policy is the most accomodative and the Yen is low (which is supportive for Japanese exports).
US Housing: There have been reports this week of new lines of credit being made available to sub prime lenders, Freddie Mac throwng about $20B into the sub prime pot and investors like Carl Ichan looking to buy.
What we are seeing here is the willingness of gov't and investors to further fund the system with credit. This will allow for the the continuation of the favorable rates and payment levels in the loans that have already been made. With the job market going well it's likely that these borrowers will continue to make their payments at their present levels. What this means is that the housing crisis in the sub prime sector will be contained, the problem is not likely to get worse and there will be no spill over or contagion to other parts of the economy.
Don't listen to me though, listen to Hank Paulson (sub prime contained) and Carl Ichan (buying real estate). Eventually, everyone else will.
Fed: With the sub prime problem largely contained and controlled, the economy is set to rebound in Q3 and Q4 just as the Fed has been predicting all along. While the core CPI has been trending down, the latest core PCE shows inflation still trending up. It will take months of flattening followed by downtrending before the Fed shifts to a neutral bias; rates will not be cut this year and if the core PCE continues to trend up with a growing GDP, look for an increase late in the year.
The $: There is still plenty of pressure on the $ as markets see a Fed cut and slower economic growth (they are wrong, but price won't reflect that yet). There could be a temporary boost vs the GBP if UK GDP prints lower then consensus, which is very likely. Further $ pressure will be seen towards the end of the week as the focus shifts towards US GDP. A print there at or worse then consensus followed by a lower print in the core PCE (no prediction there at this time) further intensifies the negative $ sentiments.
BoE: Will be moving to 5.5% at the next meeting and that will be all. UK inflation is projected by the bank to be trending down afterwards so a 2nd increase will likely not be needed. These are the BoE's own projections and the current thinking of the NIESR mirrors this.
ECB: Another increase highly likely at the next meeting. We'll see how it goes beyond that as EU expansion figures to slow somewhat after the recent rate increases. The ECB focuses heavily on M3; continued expansion there can prompt them to raise rates even if inflation looks good.
BoJ: At least one more increase is all but certain this year and there is a possiblily the Japanese economic expansion will allow two. The bank is on a course to normalize rates at a "gradual" pace that will be dictated by the data. There's a slew a data scheduled for release on Thursday with the industrial production number figuring to be the most important indicator of future BoJ moves.
World Economy: Looks to be in the 4-5% range for the year with China leading the way and the US at the bottom of the curve (but trending up as the year closes). The next increases from the BoE and ECB are likely to slow their expansions somewhat towards the last quarter. Japan looks to have the highest rate of growth in the G7 this year which makes sense because their monetary policy is the most accomodative and the Yen is low (which is supportive for Japanese exports).