Experts Talk Greece Downgrade, Dollar, Jobs

by BW staffBloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Dec. 7. Win Thin, Brown Brothers Harriman The rating agencies are on the warpath, with Fitch downgrading Greece one notch to BBB+ just a day after Standard & Poor's signaled a likely downgrade of its A- rating for the country. This makes Greece the only country in Western Europe (besides Iceland) to have lost its single A status, and also puts Greece closer to the company of Eastern European BBB credits such as Russia, Lithuania, and Croatia. Fitch also kept the outlook at negative, so risks of further downgrades remains in place. In particular, S&P and Moody's ratings of A- and A1, respectively, are likely to be cut in the coming weeks. We are in the process of using new, updated budget-deficit and debt numbers for Greece in our sovereign-rating model, with preliminary results showing the country at an implied rating of BBB+[S&P]/Baa1[Moody's] currently. Preliminary rounds also show that within Europe, Spain's implied rating fell to A+ from AA (actual AA+/Aaa), Portugal's implied rating fell to A from A+ (actual A+/Aa2), Italy's implied rating fell to A from A+ (actual A+/Aa2), and Ireland's implied rating fell to A- from A+ (actual AA/Aa1). Preliminary results also shows that the U.K.'s implied rating held steady at AA/Aa2, as did the US's at AAA/Aaa. What this tells us is that despite the recovery in the global economy, sovereigns are still under pressure to be downgraded in the coming months. Like the Dubai World default, recent sovereign ratings actions underscore the need for investors to be discerning amongst countries. Vassili Serebriakov, Wells Fargo Bank Sovereign credit-rating concerns, renewed banking sector woes and some soft economic data are translating into weaker global equity markets this morning. The inverse correlation of global investor sentiment with the dollar and the yen is back, with both currencies enjoying gains today. The biggest losers are in the European region, including the pound, euro, [and] ruble…. Meanwhile, the U.S. dollar's notable resilience to dovish remarks from Bernanke yesterday hints that technical factors are turning in the dollar's favor, at least in the short term. The dollar's trade-weighted index has managed to close above its 50-day moving average for the first time since April, a positive signal for the greenback going forward. Andrew Tilton, Goldman Sachs The better-than- expected November labor market report [released Dec. 4] featured near-stabilization in payrolls, an increase in average weekly hours, outright gains in leading sectors, and a drop in the unemployment rate to 10%. Further improvement in job growth is likely over the next several months. Real [inflation-adjusted] gross domestic product growth of about 3% (just above that seen in the third quarter, and equivalent to what we expect in the fourth quarter) could ultimately generate job growth in the 100,000-per-month range or slightly higher. Seasonal issues in the January employment report and temporary Census hiring in the springtime could also help reported job growth in early 2010. However, the labor market has a very long way to go to reach normalcy again. Given the likely growth in the population and labor force, we expect it will take gains of more than 100,000 jobs per month next year just to hold the unemployment rate constant. Even if real GDP growth immediately accelerated to a well above-trend pace, it would take several years to bring the unemployment rate down to mid-single-digit levels. David Wyss, Beth Ann Bovino, Standard & Poor's Although 2010 will be far from perfect, at least it looks a lot better than 2009. The downturn appears to be over, but we think the recovery will be sluggish. Although most of the bad things have stopped happening, there are few good things boosting growth. Most important, the housing market appears to have stabilized. Home prices have now risen for five consecutive months, according to the S&P/Case-Shiller index. Home sales also have continued to rise. We worry that the scheduled end of the first-time homebuyer credit has artificially boosted sales and we still expect sales and prices to fall off after November. But the worst appears to be over for sales and prices.

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