| Steeper US curve at six months - February bfinance rates and FX consensus |
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| 05/02/2006 | |
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Some economists were still debating the ECB's February decision only a few minutes before it became public. According to the economists pooled by bfinance, the status quo is nothing more than a delay before the March meeting. There is a complete consensus on a hike at the ECB's next meeting, which is quite rare in our consensus. President Trichet's comments left little leeway for interpretation when he said that financial markets expectations of a quarter-point hike were "reasonable". At six months, the economists are at loss over what will happen, being split roughly between a second hike that would push the repo rate at 2.75% and the status quo after the first hike. Philippe d'Arvisenet, chief economist at BNP Paribas, is banking on the first option: "Due to the perspective of sustained economic activities and persistent fears about the abundance of liquidities, the ECB is likely to keep its monetary tightening up to 2.75% by the summer", he says The picture is quite similar in the US, although with more noise at 3 months since the possibility of a hike before April 2006 is clearly weighted by our pool of economists. Seven banks out of 14 see a first quarter-point hike within the next 3 months. Since the end of the tightening cycle is not anywhere in sight in the very short-term, that could even leave the Fed funds at 5% in six months time. That's the forecast of JPMorgan and Lehman Brothers, whose stance is the most aggressive of our pool. By and large, most banks say that Fed funds will reach 4.75% in six months time – and that could then be the end of it. "The arrival of Ben Bernanke should not change the orientation of the monetary cycle conducted by the Fed within the short term. We anticipate Fed funds at 4.75% at six months. The pause is likely to come at the beginning of the second quarter of 2006 and would last until the end of the year", sum up Hélène Baudchon and Sandrine Boyadjian, both economists at the Crédit Agricole. In the UK, a 4.50% base rate is to be expected over the next three months. « Though some other members of the MPC appear sympathetic to aspects of Nickell's view, it appears unlikely that a majority will vote for a cut at the February meeting, though a tightening in the vote cannot be ruled out », says Allan Monks at JPMorgan. At six months, there is some debate given the mixed views on the current growth outlook. The consensus points to a quarter-point cut. Inverted curve The long end of the curve remains at extremely low levels. The consensus points to a fairly flat curve both in the US at the end of April 2006, while the UK curve has already inverted, and seems likely to stay in its current form at least for the next six months. According to the consensus, the BoE is then likely to start trimming its rates, which could give the UK curve a flatter ridgeline. In the US, the analysts at Société Générale says that long yields will go up: "A likely rebalancing of the supply and the demand of long date bonds joined to a slight increase of the risk premium should lead a slight rebound of the long yields, so that the rate curve will become steeper while staying relatively flat." Finally, the consensus puts the euro/dollar rate at 1.23 at the end of July 2006. BNP Paribas, Dresdner, Merrill Lynch and West LB are the most bullish on the euro. For instance, at six months, Dresdner puts the €/USD exchange rate at 1.30 while it is currently at 1.20. "The narrowing of the spread between the short rates in Europe and in the US, as well as the expected slowdown of the US economy from the second half of the year should strengthen the euro, which will then rise to 1.30, mechanically tightening the monetary conditions", explains Florence Barjou, economist at BNP Paribas.  E.A. and J.L. |
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