What Wall Street economists and strategists had to say about key developments on June 7
Businessweek.com compiles comments from Wall Street economists and strategists on the key economic and market topics of June 7. Derek Holt, Scotia Capital [T]wo issues left members divided [at the weekend G-20 meeting]. One is thinking on the pace of fiscal retrenchment with Europe clearly viewing itself as facing the need to pull back on fiscal levers, and the U.S. beseeching members to instead add additional stimulus. Premature fiscal retrenchment has always been one of our concerns regarding global growth, with parallels to Japan's ill-fated moves in 1997 to tighten the purse strings, only to face a perversely worsened deficit thereafter by throwing the economy back into the soup. At the same time, however, we view the U.S. as likely to retain fiscal stimulus for an excessively long period of time, such that two years from now Europe is likely to be able to claim advancement on repairing its fiscal position, while the U.S. only then begins to face fiscal drag effects on growth. Second is that there was no move forward on a universal bank tax. Thank Canada. It's one of the few countries that for one thing didn't get dragged down by banks, and for another gets that global deleveraging is simplistically pinned upon global banks as opposed to the policy apparatus within which they have operated for years, combined with a lack of fiscal policy resolve in global economies long before the crisis hit. But the U.K. has already announced plans to go it alone, which means it will likely be a small, token measure, and the G-20 agreed to at least outline principals that should guide those economies that wish to impose a bank tax at the G-20 meeting in Toronto at the end of the month. Nick Bennenbroek, Wells Fargo Bank European officials do not appear excessively concerned about the euro—currently the main worry is the speed of the euro's decline, rather than the euro's level. Financial market weakness reflected lingering disappointment at Friday's U.S. jobs report. The G-20 central bankers and finance ministers meeting may also have played a part. The statement from that meeting suggested a greater focus on fiscal discipline, set a November deadline for new rules on bank capital, and offered no agreement on a global levy on banks. While the details weren't that surprising, the lack of action may have hurt market sentiment. A sense of nervousness still pervades markets … and while we believe the period of volatility will pass, equity markets and foreign currencies remain at risk of a further decline this week. Win Thin, Brown Brothers Harriman France is coming under scrutiny, with one astute market contact noting that France credit default swap prices are now about equal to [those of the] U.K. This comes even as French bonds have underperformed Germany this past week, with 10-year spreads the widening by 23 basis points. What's worrisome is that France is coming under pressures as the contagion continues unabated. The fact that it is spreading to core euro zone is not a good thing. Belgium and Austria, two other core euro zone countries, have also seen bond spreads widen and CDS prices rise in recent days. European officials have yet to find the "game-changer" that turns market sentiment around, so we see continued spread-widening in euro zone bond markets as well as ongoing [euro currency] weakness. We believe that the "game-changer" remains debt restructuring coupled with aggressive IMF and World Bank-backed structural reforms, à la Latin America under the Brady Plan. A muddle-through approach will only lead to a Lost Decade for the euro zone. Jan Hatzius, Goldman Sachs Our monetary policy views remain sharply at odds with those of other forecasters, who have recently pushed out the date of the first [Federal Reserve rate] hike but for the most part still expect the first move in early 2011. In contrast, we see no rate hikes before 2012 as both inflation and employment are likely to remain far below the Fed's "dual mandate" targets. Indeed, the risks over the next 6-9 months are tilted not to early rate hikes, but to a return to quantitative easing (although that's not part of our baseline forecast). Admittedly, some of the noises from the regional Fed presidents have been quite hawkish recently, with Kansas City Fed President [Thomas] Hoenig reiterating his view that the funds rate should rise to [1 percent] by the end of the summer and Atlanta Fed President [Dennis] Lockhart suggesting that the time to consider rate hikes is approaching because the current near-zero level may soon become "inconsistent with maintaining price stability." We do find this a bit worrisome, because it is sharply at odds with our own view of the balance of risks. But we believe that Chairman Ben Bernanke and other members of the FOMC leadership will continue to take a different view.