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Friday Notes

ECB to tighten twice in H1 2007, while Fed Pause to last untul spring

Fri, Nov 10 2006, 14:23 GMT
by HVB Group Global Markets Research

UniCredit Group  |  View company's profile


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Fed

. The anti-inflation bias of the Fed is increasing; at the same time, the unemployment rate is falling. We are, therefore, adjusting our Fed forecast, but do not change our underlying picture. The next Fed move will be a rate cut. But it will not come until March of next year. At only 50 basis points, the easing phase will also be more modest than projected so far (pages 4-5).

ECB

The eurozone can increasingly decouple from the US slowdown thanks to strong domestic demand. We are, therefore, raising our growth forecast for 2007 to 2%. That is pouring additional fuel on the ECB’s inflation concerns, especially since its argumentation is increasingly based on excessive liquidity supply. The rate increase in December will, therefore, be followed in the first half of 2007 by two further mini-hikes (pages 6-8).

Yields

 The Fed and ECB revisions imply slightly higher government bond yields than anticipated so far. The timeframe remains, however, unchanged. US yields still have some downside potential until spring 2007, but will rise appreciably the reafter. Bund yields, in contrast, have extensively bottomed out and will continuously rise in 2007 (pages 9-11 and chart below).

EUR

 Up to the end of this year, EUR-USD should trade sideways. Continuing strong EMU domestic demand combined with further ECB rate hikes and lower Fed interest rates should give the EUR new momentum until spring 2007. Thereafter, however, the USD will post gains again (pages 12-15).

Further topics:

  • Weekly Comment: The ECB goes for 4 (page 2).
  • Data outlook: Strong EMU-wide growth numbers in the third quarter; US inflation continues to decline (page 16).
  • Market outlook: Government bonds and the euro well supported


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