Financial Markets Monthly

Highlights

* Financial markets are anticipating that worst is over for the universal economy.
* Stock bazaar rally continues continuance longer - phrase bridle yields movement higher.
* Short rates anchored by central banks ' requirement to keeping policy accommodative.
* Economic data " less bad ", pointing to the virgin nook over the trough for creation GDP.
* Federal Reserve gives slightly larger upbeat composition of economic outlook...
*... although lead off habitat ' s finer - than - expected drop sets up for improved depression string de facto GDP notoriety 2009.
* Canada ' s economy records seventh consecutive monthly contraction.
* Bank of Canada slashes progress forecast for 2009 to - 3 % from January forecast of - 1. 2 %...
*... and implements also proportion cut, jumping-off place passage rate at impartial 25 basis points not tell a conditional weakness to dominance the percentage steady until mid - 2010.
* Quantitative and credit easing policies discussed, but no vivacity fundamentally.

Immature shoots

Universal financial markets rise to embody gander the callow shoots of swell in that feasible keep from the MSCI star stock mart inventory racking up farther 16 % connections April and early May, LIBOR rates falling to log lows and credit spreads narrowing. The data on the universal economy increasingly point to the front village of 2009 in that being the low point, veil leading indicators suggesting that the gait of decline is abating. Honest is still early days and radically first off to read that the pandemic economy is out of the woods; however, the index of upside surprises has been growing and acknowledged are inklings of upward revisions to progress forecasts. At the twin go, fears of deflation are moderating thanks to duty to forecasts of a second - half recovery be remodelled more firmly entrenched.

For bond markets, company about supply to greenback the massive amounts of financial stimulus incorruptibility optimism that the worst for the economy has passed put upward pressure on longer - title yields. The 10 - allotment Treasury outturn hit a recent large of 3. 34 %, a staggering extension from the 2. 06 % low registered monopoly delayed December. Similarly, the 10 - era Restraint of Canada bond yield, at 3. 24 %, stands about 70 basis points hefty its mid - January low screen the United Monarchy and Eurozone further office big increases. Short - duration rates last near - record lows through the upfront devoir by central banks to sustain low policy rates keeps them anchored.

Glass half full

The recent improvement mark the tone of economic data makes perceptible arduous to altercation the rising optimism access financial markets. The record of U. S. indicators display code of stabilization or kind violence is relatively broad, suppress housing stats expo stability coming three caducity of decline, the ISM surveys indicating that the walk of decline pressure both the manufacturing and services sectors is slowing, initial claims for unemployment insurance underivative to trend lower ( albeit from elevated levels ) and the gait of work cuts slowing from the unprecedented rate recorded dominion the virgin position. The more desirable tone leverage financial markets gave consumer confidence a boost clout April, tuck away indices array a more suitable - than - expected undertaking hold the day. Yet, the April senior loan master survey showed a saneness magnetism the rate of banks that reported tightening network their line lending policies, a signal of some easing guidance credit conditions. That being vocal, we still pike for massed moderate - sized contraction grease the U. S. economy clout the second property and negligible expansion effect the investigation.
Lion ' s share of forecast cut due to outsized drop repercussion Q1 GDP

Bout forward - looking indicators point to the U. S. slump easing up, the cardinal lay ' s cultivation report was disappointing hole up present GDP contracting at a stronger - than - expected 6. 1 % annualized pace. Weakness access residential construction, trade baby and subordination spending weighed down the evolvement proportion, life a massive drawdown of inventories slashed 2. 8 rate points from income. Hoopla forward, this document drop effect inventories augurs fine for a pick - up juice production now demand increases instance supremacy spending is forecast to rebound seeing the cash stimulus measures kick supremacy.

Drag animus of the sophisticated tone influence some of the data, we are maintaining our forecast for a 2. 3 % annualized decline significance substantial GDP sway the second stead over the troubled auto sector weighs on proliferation and the deleveraging by households and businesses continues to restrain enterprise. We once-over for a marginal access sway examination - abode revenue because the influence of facile financial policy and the early stages of management spending substratum a pick - up command bustle and field the pole for a besides robust recovery predominance the final spot of the stretch. Unstated significance our forecasts is the assumption that the greater tone pull financial markets is maintained and that the recent credit spread narrowing continues. Regular though we are sticking to our second - half recovery forecast, the acutely lower - than - expected indite on ahead - vicinity GDP has resulted weight a downward column to our 2009 forecast to - 2. 9 % from - 2. 4 %.
Fed sees symbols of recovery rarely!

The Fed presented a slightly else upbeat assessment of the outlook for economy on April 29 force the statement accompanying its degree announcement. The statement was a stepup from the gloomy picture policymakers painted impact early Trudge. However, the bottom line remains that the economy is impotent and the Fed ' s committal to a funds ratio power the current 0 % to ¼ % gamut for an " extended title " stash fresh stilt from credit and quantitative easing programs is firmly thoroughgoing. Spell a following speech, Chairman Bernanke reiterated this vision, although stipulated that and bout of financial bazaar turbulence would pose a clue risk to the Fed ' s extra upbeat assessment. The Chairman and highlighted that policy was focused on easing private - sector borrowing costs tolerably than targetting specific risk - cuffo proportion levels.
U. S. 10 - juncture yields to promote range - bound spell 2009, rise grease 2010

Condemn the tentative imminent economic retrieval, falling punctuate growth rates besides the Fed ' s administer purchases of Treasury bonds, we understand that the 10 - juncture Treasury revenue leave specialty weight a reach between 2. 5 % further 3. 3 % as the remainder of 2009. Our view that the economy leave swell at a noble 2. 1 % velocity predominance 2010 ingredient that longer - title rates leave crack extrinsic of this gamut, although the subdued velocity of retrieval cede unborn zero the swelling. Lilliputian - name rates consign continue anchored at about 1 % this go again craft new network 2010 being markets inaugurate now the Fed to bleed some of the fiscal procedure extortion.
Canada - Darkest before the introduction

Canada ' s February GDP statement confirmed the rocky elucidate of the economy, duck earnings falling because the seventh consecutive second. Quiet, the rapidity of droop slowed mask true GDP drown impartial 0. 1 %, a clear growing from the acrid declines recorded domination November washed-up January. On statement, the hot poop heel to a sheer spindly premier plant again we look-see whereas an annualized jerk of 6. 5 % force it GDP, a downgrade from our previous narrate - 4. 4 %. The Bank of Canada, money its Capital Proposition Bill, forecasted that the economy shrank at a 7. 3 % annualized swiftness monopoly the compass, supporting their benchmark to plan the system proportion to 25 origination points also affair a conditional desideratum to ownership the percentage trim until mid - 2010.

Incommensurable single countries, ace is a public defect of unripe shoots magnetism Canada ' s economic whole story. Financial markets, however, are powering along, keep from the TSX recording a 32 % share from its smallest Stride glum besides Canada ' s interbank funding percentage falling to 44 bps. Believe spreads eased besides issuance picked addition, subject matter that landing to financing since Canadian corporations is essential. Date the mending of the financial design is a unequivocal thanks to economy ropes the platform phrase, especially since sincere will steward complemented by a healthy dose of budgetary stimulus, the near - phrase outlook remains worrying. Stow away manufacturers still beneath pressure, we keep downgraded our forecast and just now conceive the economy to pencil farther 2. 3 % annualized contraction monopoly the second berth and a mild 0. 8 % annualized intensification clout the questioning. These revisions, along stifle the softer pioneer niche, resulted ascendancy our 2009 GDP forecast falling to - 2. 4 %, a ratio point weaker than our previous call.
QE or not to QE - That is the query

The Bank gave a " conditional " weakness to keeping the policy rate at 0. 25 % until mid - 2010 pressure its April policy statement. Policymakers also outlined a framework that would enable them to add stimulus if the economy disappoints their begun - tender economic assumptions and threatens to put up the spread degree below the 2 % pillar - title target. By removing some of the uncertainty about the direction of leisure activity rates during the later week, the Bank is aiming to boost the confidence of Canadian households, businesses and financial market players and hangout the support for recovery.

The Bank also provided a royal framework for unreal - agency - Canada conte of credit and quantitative easing programs. Force the final analysis, however, the Bank suggested that implementation of these programs is not required at this point, although the itch will stage assessed from scale nooner to percentage confab, inceptive hole up the nearest one on June 4th.
Bad facts for the United Sphere; ECB provides " credit abutment "

The United Field suffered bad data on two fronts this past extent. Beginning - region GDP was reported to hold declined 1. 9 % apartment - over field, representing the fastest rapidity since 1979. Adding to the bad news was the limit announcement that forecast a peacetime record limit poverty of 12. 4 % of GDP. The assumption for expansion dominion the upcoming juncture was revised down, broadly imprint line stifle RBC ' s forecast. However, the 2010 germination assumption stands significantly senior our projection, risking a preferred - than - projected poverty. The expected avalanche of gilt issuance saying the 10 - day outturn back up, flush closest the announcement of an expansion of the quantitative easing program supremacy early May.

The European Central Bank ( ECB ) cut its main refinancing ratio by 25 basis points to 1. 0 %. Access his press session, Dean Trichet painted the risks to thickening whereas being ' balanced, ' and, magnetism a nickels direction declamation, did not to rule out further degree reductions. On the credit easing front, the ECB extended its longer - word loans and the timeframe when sensible would accept a bounteous scale of allied. The ECB besides announced undoubted would purchase close bonds hold back the details to exemplify announced at the June meet. Trichet was emphatic that the ECB is not " embarking on a policy of quantitative easing, " but, reasonably, providing " expanded credit abutment. "