ECB, BoE, Emerging Economies’ Inflation Concerns, G7 Meetings, Global Corporate Defaults
Co-written with other RGE Lead Analysts.
In the Monitor today:
ECB on Hold
Unsurprisingly, the ECB left the refi rate unchanged at 4%. But the statement following yesterday’s rate decision sent a clear signal that the ECB’s stance is changing. Trichet chose to emphasize that “as the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy.” Moreover, “risks to this medium-term outlook for price developments are confirmed to lie on the upside”, rather than “fully confirmed” as in the previous statement. With many recent macro indicators suggesting a significant growth slowdown in the Eurozone is there a rate cut in the ECB’s pipeline in the next months? Read: “ECB Rates Unchanged But Risks to Euro-region Growth Increasing”
BoE Cuts Benchmark Rate
The Bank of England did not surprise either. Yesterday’s 25bps rate cut that brought the benchmark rate down to 5.25% comes in the wake of increasing evidence of a slowdown in economic growth in the UK and the risk of a more severe downturn. Did inflationary pressures curb the BoE from making a more drastic cut? Check out: “Bank of England Acknowledges Sharp Slowing in Activity: Cuts to 5.25%”
Dealing with Inflation Concerns in Emerging Economies
Though central banks are generally expected to cut or hold rates during the financial crisis, inflation is a persistent concern, especially among emerging markets – some of whom continue to resort to price controls to contain inflation. See: “Price Controls to Curb Inflation in Emerging Economies?”
The Chinese yuan is appreciating at a faster pace against the dollar since the fourth quarter of last year, but still falling against the euro. What will take center stage during this weekend G7 in Tokyo? Will it be yuan weakness or dollar weakness? And will the G7 shift from its focus on faster yuan appreciation to focus on more flexibility? Follow: “Cracks in the G-7 Consensus on Yuan Appreciation, Flexibility?” and “G7 Meeting Preview: NATO (No Action, Talk Only) Redux?”
Global Corporate Defaults on the Rise?
Although global default rates of highly indebted companies are at an all-time low, key indicators like credit default swaps, high-yield bond spreads and leveraged loan prices are all spelling trouble ahead. The iTraxx Crossover Index, for mainly high-yield companies in Europe, went well above the record of last August’s crisis. And the CDX index is pricing in massive corporate defaults rates as well. Edward Altman predicts 4.64% of the $1.1 trillion in junk bonds outstanding will default this year, up from 0.51% t at the end of 2006, and much higher default rates – possibly above 10% – in the case of a serious US recession . See “Corporate Default Rates Set To Rise Sharply in 2008”
Check out some of latest writings on RGE Monitor.com:
*In his Global EconMonitor, Nouriel Roubini illustrates the path towards the coming financial crisis: The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster
*RGE Analyst Elisa Parisi-Capone looks into why the downgrade of a bond insurer from AAA to AA is causing such widespread concern that market participants and regulators alike are considering a bail-out of the industry? Read: Monoline Insurers – How Do They Work and What’s At Stake?
*On the Europe EconoMonitor, Roberto Tamborini, Sarah Guillou and Stefano Schiavo look into The threats of the strong euro: real and imagined
*On the Latin America EconoMonitor, Walter Molano analyzes Brazil’s vulnerability to a downturn in the U.S. Read: Brazil: Inspecting the Couplings
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