Central Banks & Interest Rate Forecasts

In light of dovish comments by central banks and the surprising 100bp rate cut by SNB Thursday, forecasts on cash rates were revised down more aggressively. For the week ended Nov 21, economists priced in a greater interest rates cut in US, Europe, United Kingdom, Australia and New Zealand in central bank meetings in December.

Fed: Deutsche Bank caught up with Danske Bank, Goldman and Morgan Stanley to expect a 50bp cut in December. ‘The recent further weakening of economic activity confirm the view that the economy is dropping into a severe recession. Under these circumstances, and given the recent sharp drop in inflation, we expect the Fed to bring all available ammunition to bear as quickly as possible. This points to a rate cut to unprecedented levels at the December meeting, and indications that they could remain at a very accommodative level for some time to come,’ the bank commented.

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Bank of Canada and Reserve Bank of New Zealand are both expected to cut interest rates again this week. BoC is expected to cut 50bps to 2.0% while RBNZ is expected to cut 1% to 6.5%. BoE minutes will be featured and should show unanimous vote for the coordinated global 50bps cut earlier this month. Bernanke’s will testify at House Budget Committee on Economy on Monday.

The economic calendar in US is pretty light next week. Economic data include leading indicators, house price index and existing home sales. From Eurozone, main focus is on manufacturing and services PMI. UK Q3 GDP and Sep retail sales will be released. Australian PPI and CPI, New Zealand CPI and Canadian retail sales, CPI will also be released.

Note that firstly, inflation are now a lesser threat that recession in the world economy, in particular after commodity prices tumbled in the past few months. Hence, the CPI data will have much less impact to the markets. Secondly, further down side is still expected in the global stock markets which will, in turn, trigger rally in dollar and yen. Though, it could either be European led or US led. And hence, close attention will be paid to growth data from Eurozone and UK which could trigger much volatility in the stock markets as well as the forex markets.
By ActionForex

Less than two weeks after slashing its overnight lending rate 50 basis points as part of a concerted action by central banks around the world, the Bank of Canada may cut its key lending rate a further 50 basis points to 2% at its next meeting, economists say.

With the U.S. economic outlook darkening and prospects for Canadian exports dampened, several economists say there are plenty of reasons for the bank to lower the key rate again at its next policy meeting on Oct. 21.

“We’re saying the Bank of Canada will cut by 50 basis points and that’s it and then it stays there at least until the end of 2009. The point now is if indeed it appears the Canadian economy is slowing rapidly because of the darkening outlook in the U.S. there’s no point in waiting,” said Laurentian Bank chief economist Carlos Leitao. “If there is a need to cut the time is now, not later on, even with the lags involved in these things.”

TD economist Pascal Gauthier said the most recent manufacturing sales report was “dismal,” and while the employment report from Statistics Canada surprised with a big employment gain of 107,000 jobs, Gauthier believes it was likely an anomaly.
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Shortly after the unprecedented $700B financial bailout plan was passed, the Fed acted together with major central banks to cut interest rates. The Fed announced to reduce its key federal funds lending rate and discount rate by 50bps to 1.5% and 1.75%, respectively. In Europe, both ECB and the Bank of England ratcheted the rates by 0.5% to 3.75% and 4.5% respectively. The central banks of Canada, Sweden and Switzerland also lowered their key rates. In Asia, China joined by trimming its key rate by 27bps. It’s the first time that global banking authorities worked together to cut interest rates in order to stimulate economy and restore market confidence.

As expected, dollar fell against other major currencies upon the rate cut across the board. In NY morning, USD fell to 1.3663 from 1.3645 (Tuesday afternoon) and 1.7323 from 1.7510 (Tuesday afternoon) against Euro and Sterling. It also lost grounds against Yen, Canadian dollars and Swiss francs.

Reducing interest rates so abruptly indicated financial crisis has intensified. Accompanied with recent weak economic data, recession does not only spread from the US to Europe but also to Asia Pacific regions. World economic slowdown induced investors’ worries on oil demand growth.

Although crude oil for November delivery bounced to 90.99 after making a low at 86.05, 8-month low, renewed selling pressure after release of the disappointing weekly inventory report forced the black gold to trade below $90/bbl again (currently at 87.00). As 93.02 resistance holds, we maintain our near-term bearish view on crude oil price and expect price would fall to 85.42 (Jan 08 low) first.

Demand has been slowing very rigorously in developed countries. According to Credit Suisse, OECD consumption has fallen 3-4%. The market has dried up. There’s no way for traders to access to credit and therefore they have to deleverage their positions. EIA also slash world oil demand growth next year by 140 000 bbl/day.

EIA has just released report petroleum inventory. Crude oil inventory unexpectedly increased by 8.123 mmb, much higher than consensus of 2 mmb. As for gasoline, the build of 7.2 mmb also exceed market forecast of 1 mmb. Although distillate stockpile fell last week, the less than 1mmb draw was lower than 1mmb reduction as expected by the analysts.

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Action Insight Mid-Day Report

Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Sweden’s Riksbank join forces today in a historical, emergency, coordinated global rate cuts by 50bps ease save the world’s economies from the worst crisis since the Great Depression. Fed, ECB, BoE, BoC and Riksbank will cut by 50bps. SNB cut by 25bps. PBoC of China also joins to cut by 27bps. BoJ didn’t participate but said it supports the move.

The resulting interest rates are:

• Fed - 1.50%
• ECB - 3.75%
• BoE - 4.50%
• BoC - 2.50%
• SNB - 2.50%
• Riksbank - 4.25%

Equity markets response positively to the announcement initially with FTSE 100 turned positive. However, European stock markets lacked follow through strength and turned south again. US stock indices are mixed in tight range.

In the forex markets, yen gives back earlier gains against most major currencies but in general, it’s still holding in established tight range. Dollar also continues to consolidate against most major currencies. Aussie recovers after diving to as low as 0.6445 earlier today. However, note that key near term levels still holds. Dollar index retreats mildly but is still holding above 80 level. There is no change in the yen and dollar bullish outlook.

Earlier today, UK government announced a plan to invest about 50b pounds to prevent collapse of the UK banking system. The government will buy preference shares and BoE will make 200b or above available for banks to borrow under the special liquidity plan. UK government will also provide a guarantee of 250b pounds to help refinance debts. Tomorrow’s BoE meeting is cancelled after today’s rate cut.

On the data front, US pending home sales beat expectations by rising 7.4% mom in Aug. Canadian housing starts rose slightly from revised 217k to 218k in Aug. Germany industrial production rose 3.4% mom, 1.7% yoy in Aug. Eurozone Q2 GDP was finalized at -0.2% qoq, 1.4% yoy.

(CEP News) - Responding to a series of extraordinary events that took place over the weekend, the Bank of Canada pledged to continue closely monitoring the developments, but said it wouldn’t speculate as to how these events would impact the Canadian economy.

“Although credit conditions in Canada remain challenging, they are better in many respects than those in other major markets,” said a BOC spokesperson. “The financial system in Canada remains sound.”

It was announced late Sunday night that Lehman Brothers was filing for bankruptcy, that Bank of America was taking over Merrill Lynch, and that the Fed broadening the collateral accepted at its various lending facilities.

“The Bank welcomes the initiatives of the Federal Reserve System to provide support to U.S. financial markets,” reads a statement on the Bank of Canada’s web site.

The BOC also pledged to continue providing liquidity as necessary to ensure the functioning of financial markets, but made no mention as to whether additional extraordinary measures would be taken at the present time.

Lehman Brothers Holdings Inc, founded in 1850, filed for Chapter 11 Bankruptcy just after midnight EDT. The filing, which will not include its broker-dealer subsidiaries or other units, including Neuberger Berman, marks the first bankruptcy of a Wall Street firm in nearly 20 years.
Minutes after the announcement, Bank of America announced it will acquire the world’s biggest brokerage firm, Merrill Lynch & Co. for $50 billion U.S.

The Bank said it would pay $29 a share for the firm, a 70% premium to Merrill’s share price based on Friday’s closing price. The transaction is set to close in the first quarter of 2009, and three directors of Merrill will be joining the Bank of America board.

By Erik Kevin Franco

(CEP News) - The Canadian dollar gained a half-cent on Wednesday after the Bank of Canada left interest rates at 3.00% and suggested it is in no hurry to lower the overnight target.
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(CEP News) - The Canadian dollar is making broad-based gains on Wednesday afternoon on the strength of the Bank of Canada’s decision to hold interest rates at 3.00%.
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(CEP News) Ottawa - The Bank of Canada held its key lending rate at 3% Wednesday for a third consecutive announcement date, and several economists now expect the rate to stay where it is for the rest of the year.
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(CEP News) - A decision by Canada’s central bank to hold interest rates and no indications of an upcoming cut sparked a more than one cent rally in the Canadian dollar and a sharp selloff in bonds.
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