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2. The equity market will climb a wall of worry
- Publication Date:
- 09-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- The equity market has had a tough few months due to a combination of concerns, including fears that a US-led attack on Syria might lead to a wider Middle East conflict and threaten oil supplies. Of greater concern for equities are worries that a turn in the US monetary policy cycle could eventually kill off the US recovery. However with valuation not looking like a barrier to further gains, this four-and-a-half year equity bull market will in all likelihood climb the wall of worry and set another new high before the year is out.
- Topic:
- Economics, International Trade and Finance, and Markets
- Political Geography:
- United States, Middle East, and Arabia
3. Attack on Syria: the danger is in escalation
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- It is now looking all but certain that the United States will launch some form of attack on Syria. What is unclear is the severity and duration of the attack. Leaving aside the political ramifications, the immediate economic effects are likely to be limited (and are mostly already factored in). Opposing impacts on inflation and activity means that changes to central bank policy could be postponed. A prolonged campaign could have wider ramifications, not least if there is a risk of a geographical widening of the conflict.
- Topic:
- Foreign Policy, Economics, International Trade and Finance, Markets, and War
- Political Geography:
- United States, Middle East, Arabia, and Syria
4. Fighting the Fed
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Since the US Federal Reserve signalled that a turn in the interest rate cycle may be on the horizon, UK and to a lesser extent Eurozone interest rates have tracked US rates higher. But the UK and Eurozone economies are less well placed than the US to cope with higher interest rates. Simulations carried out on our Global Economic Model show that higher rates would be particularly harmful to the UK economy's embryonic recovery. In an attempt to stem the rise in interest rates, the Bank of England and the ECB have introduce forward guidance but with little, if any, success. Markets do not seem convinced by the Bank of England's commitment to forward guidance and are testing its resolve. It seems likely that over time both central banks may have to strengthen their forward guidance, in the case of the Bank of England by augmenting it with further quantitative easing.
- Topic:
- Economics, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- United States, United Kingdom, and Europe
5. If the Fed threshold changes
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- At the end of last week, there were rumours that the Fed may change its unemployment threshold from 6.5% to 6%, either at its 30-31 July meeting or, perhaps more likely, at its 17-18 September meeting. Such a move would confirm that the Fed funds rate is likely to remain in its current 0-0.25% range until 2015, which is in line with our baseline scenario. But while the change would be an acknowledgement that the US labour market has performed more strongly than expected, the change – if implemented – could still be a mistake as it may erode the value of forward guidance by moving the goalposts.
- Topic:
- Economics, Markets, Labor Issues, and Financial Crisis
- Political Geography:
- United States
6. US recovery on track
- Publication Date:
- 07-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Recent US data have been uneven. An improving manufacturing ISM survey was offset by non-manufacturing data being worse than expected. Last week a strong consumer credit number was balanced by weaker small business confidence. The US economy almost certainly went through a soft patch in Q2. However, on balance the recovery–unexciting as it has been–remains on track, with some possible further mileage to be had from equities. This is consistent with the recent dovish statement by Fed Chairman Bernanke, suggesting that the tapering of quantitative easing is still some way off.
- Topic:
- Economics, International Trade and Finance, Markets, Global Recession, Labor Issues, and Financial Crisis
- Political Geography:
- United States
7. Our bond market, your problem?
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Comments from the US Federal Reserve aimed at signalling that monetary policy cannot stay at historically low levels indefinitely have caused bond yields and credit spreads to rise both in the US and abroad. Higher borrowing rates are particularly inappropriate for the Eurozone which, unlike the US, is still struggling to emerge from recession. This tightening of financial conditions will place pressure on the ECB to act. Although surveys show that investors' bearishness on US government bonds is at an extreme level, suggesting that in the coming weeks bond yields are more likely to fall than rise, the longer-term trend in bond yields is now upwards. But we do not expect the rise in yields over the next two or three years to kill off the US recovery. Consequently, we believe that the US equity market is still on an upward uptrend, albeit one that will experience regular spikes in volatility as the Fed gradually moves away from its ultra-loose policy.
- Topic:
- Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- United States and Europe
8. Faster taper – limited impact
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Markets took fright after Ben Bernanke's press conference on 19 June at the prospect of an early end to QE. Bond purchases might be tapered off sooner, as the Fed now expects unemployment to fall to its target of 6.5% next year rather than in 2015. It is not yet clear whether any of the bonds bought as part of QE will eventually be sold off. While it is obvious that an end to the Fed's purchases will have an impact on output growth and asset prices, our Global Economic Model shows that the effects will be limited.
- Topic:
- Markets, Global Recession, Labor Issues, and Financial Crisis
- Political Geography:
- United States
9. UK housing market: bellows to a bubble?
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- The housing market is recovering, according to recent price and activity data. Post-crisis price corrections were smaller in the UK than in the US and much of Europe, and demand is now being bolstered by the government's Funding for Lending and Help to Buy schemes. This has given rise to some worries that the UK is in danger of inflating another house price bubble. While housing supply is very tight, we are not convinced that these schemes will have enough impact on demand to cause prices to take off.
- Topic:
- Economics, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- United States, United Kingdom, and Europe
10. The case for rising US corporate capex
- Publication Date:
- 05-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Shifts in financial balances between sectors of the economy are worth watching because they can signal broader cyclical changes. The US household financial balance turned negative in Q1. But that was mainly due to distortions in income related to tax increases in 2013. Taking the average of Q4 2012 and Q1 2013, households still have a positive balance. More importantly, the conditions are in place for a rise in capital expenditure (capex) by the corporate sector. This would allow both household and public sector savings to increase. It would also mean an upside risk to our main scenario for the US economy.
- Topic:
- Economics, International Trade and Finance, Markets, and Financial Crisis
- Political Geography:
- United States
11. Is the recovery sustainable in the US and Europe?
- Publication Date:
- 02-2010
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- Following the worst recession since the 1930s, the US, UK and Eurozone economies have all now returned to positive growth. With the boost from policy stimulus and the inventory cycle peaking, however, this raises questions about the sustainability of the current rebound. The analysis presented here suggests that the recoveries in both the US and Europe will be relatively muted compared to recent historical experience. The US is likely to be the growth leader, reflecting the more dynamic nature of its economy and financial sector. A key uncertainty relates to how labour markets will perform during the recovery phase. To date, the rise in US unemployment been particularly severe when compared to the experience of Europe. In light of the sharp falls in European productivity, we expect employment gains in Europe to be more muted in the recovery phase than in the US. The performance of residential real estate markets also remains important. Home prices in the US are now close to fair value by most metrics, suggesting that the correction in prices is likely to be bottoming out. In Europe, only Spain and Ireland appear to be in the midst of substantial housing market corrections. Commercial real estate markets are also facing ongoing corrections in many countries. While conditions in the US and Eurozone may deteriorate further, commercial property values appear to be stabilising in the UK following earlier sharp declines. The ability of the banking sector to finance the economic recoveries in the US and Europe remains a key risk to the growth outlook. As the process of absorbing credit losses and rebuilding capital is likely to be protracted, the normalisation of lending standards is likely to take longer than following recent recessions. This is a particular concern for the Eurozone, where bank funding is more important for companies. Whether domestic demand in the US and Europe recovers will also depend on whether private sector deleveraging has further to run. The destruction of household net wealth in the US suggests that the personal savings rate has further to rise, whereas there no longer appears to be a pressing need for households in the UK and Eurozone to consolidate their balance sheets. In contrast, non-financial corporations in the US are in a stronger financial position than their European peers, having not increased debt levels as rapidly during the credit boom. Risks around public finances have received the most attention in recent weeks. In particular, the adjustments underway in Greece pose a risk of potential contagion from sovereign credit risk that could threaten growth on both sides of the Atlantic.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- United States, United Kingdom, and Europe
12. Credit Crunch Watch
- Publication Date:
- 10-2009
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- The financial stress indicator is a composite index of a number of indicators including risk spreads, mortgage spreads, equity volatility, commercial paper and commercial loans outstanding and the spread of LIBOR rates over T-bill rates (the “Ted” spread). The stress indicator fell again last week, driven by a further narrowing of corporate bond spreads and lower equity volatility. These shifts offset a rise in 30-year mortgage spreads. Stress levels are now at their lowest levels since February 2008, and while still well above their long-term average have also dropped below the levels seen in previous periods of distress such as in the early 1990s and in 2001- 2003.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- United States
13. Financial meltdown averted – but how deep and how widespread will the recession be?
- Publication Date:
- 01-2009
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- The credit crunch that began in July 2007 intensified dramatically in September 2008, with a series of bank failures prompting rescues and effective nationalisation of major financial institutions in the US, the UK and the Eurozone. Despite massive intervention, financial stress rose to new highs at the start of Q4 2008 as financial markets dried up, with treasury bond yields falling, interbank lending rates still high, emerging market spreads widening sharply and stock markets plunging further. Faced with financial sector meltdown, many governments have recapitalised banking sectors and guaranteed interbank loans and bank deposits to try to shore up confidence in the financial system. These moves have averted a meltdown, but the spotlight has moved onto the rapidly weakening real economy – both world growth and world trade are now expected to decline in 2009, making it the worst year since 1945.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- United States
14. Why are US home foreclosures so high?
- Publication Date:
- 06-2009
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- US mortgage foreclosures have risen to extraordinary heights in recent months, with the scale of the distress in the US mortgage market much greater than in the UK. Key factors behind this divergent performance include laxer underwriting standards in the US and the widespread existence of 'non-recourse' loans. The latter allow borrowers in negative equity to walk away from their mortgage debt and sap the incentive to remain current on 'underwater' loans. As a result, steep house price falls can generate a sharp rise in foreclosures even without high interest rates or unemployment. In the UK, by contrast, there are strong incentives for home owners to remain in their properties, even when in negative equity.As a result, the escalation from arrears to foreclosure in the UK is much more limited. This may head off very abrupt prices falls but could also mean a more drawn out process of adjustment in the housing market.
- Topic:
- Debt, Economics, Markets, and Financial Crisis
- Political Geography:
- United States
15. Slump in wealth to hinder global recovery prospects?
- Publication Date:
- 05-2009
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- Since the credit crunch began in Q3 2007, there has been a dramatic slump in the prices of many financial assets. Global equity prices have dropped some 40-50% from their peaks in the major economies and by as much as 70% in some emerging markets. Many classes of other private sector securities have also seen sharp falls in value. Corporate bond spreads have exploded as defaults have soared, as have mortgage-backed securities (MBS). Currently, many classes of MBSs are trading at less than 10% of their par value, and even AAA-rated tranches are trading at as little of 25% of par.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- United States
16. How far away is a global recovery?
- Publication Date:
- 03-2009
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- Steep drops in output have been recorded across the industrialised world and much of the emerging market world in recent months. Such has been the scale of these declines that there is now little doubt that the global economy is set for its worst year since the end of WWII, with world GDP forecast to fall almost 1½% (and more than 2% at 2000US$). Significant uncertainties nevertheless remain about the economic outlook, in particular about how deep and protracted the recession will prove to be and how rapid an eventual recovery can be expected. A key factor generating uncertainty is that the current recession has been sparked by and accompanied by a major financial crisis. Recessions of this sort are often more severe than 'standard' recessions, featuring deeper and more sustained drops in asset prices, and a weaker impact from policy interventions due to malfunctioning banking systems. Equity and house prices have continued to drop in the early part of 2009, and there looks to be a significant risk that this weakness will drag on for some time – the average duration of stock price declines in previous financial crises is more than three years and for house prices around six years. The financial sector also remains in a highly dysfunctional state. Although the credit tightening process is showing some signs of coming to an end, stress levels remain extremely elevated and risk appetite is low with banks stuck in 'balance sheet repair mode'. This process is unlikely to be complete for some time. Retrenchment has also become a priority for the corporate and household sectors. In the face of a plunge in final demand, firms have slashed investment and begun destocking. Worryingly, the destocking process could continue f or several quarters as the ratio of inventory to sales remains high. US households were net re payers of debt in the final quarter of 2008, and it seems unlikely that the appetite to take on more debt will recover quickly there or elsewhere in the face of steep increases in unemployment and large falls in household wealth. Taylor rule analysis suggests that the 'appropriate' short-term interest rate for the major economies has now turned negative, supporting the big shift to quantitative easing now under way. Eventually, this and other stimuli in the pipeline should produce a strong recovery. But the outlook for 2010 has weakened significantly in recent weeks and the risks remain skewed toward a more deflationary outcome than that envisaged by our baseline forecast.
- Topic:
- Economics, Markets, Foreign Direct Investment, and Financial Crisis
- Political Geography:
- United States