the recession, the ox and obama

www.td.com/economics Global Markets February 10, 2009 1 TD Economics February 10, 2009 Global Markets THE RECESSION, THE OX AND OBAMA CONTENTS Lead Article: The Recession, the Ox a nd Obama . . . 1 U.S. Fixe d Inco me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Canadian Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . 5 U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Cana dian Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Japan ese Y en . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 U.K. Poun d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Austr alian Dollar/New Zeala nd Dollar . . . . . . . . . . . . 11 Swiss Franc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Summa ry Fore ign Excha nge T able . . . . . . . . . . . . . . 13 With the arrival of the hard month of F ebruary, it seems that the weather patterns serve as a worthy barometer of economic and (and some) financial market trends. Though not ‘new’ news, the G7 economies have fallen off a cliff, as the economic data continues to disappoint in a big way. The unravelling in the global economy ha s been so virulent that it has even caused the IMF to significantly lower their expectations for global growth for 2009 to just 0.5%. Ad- vanced economies are predicted to fall by 2% in 2009, while emerging markets that are used to growth well in excess of 5% are poised to grow only 3% this year. It seems that as we usher in the Chinese New Year, which is the Year of the Ox, the global recession is likely to be just as stubborn as its namesake. Fed Tries to Take the Edge Off With the fed funds rate having been lowered to a range of 0.00% – 0.25% in December 2008, there was clearly little room for manoeuvring at the January 28 FOMC deci- sion. Aside from maintaining the statement that “economic conditions are likely to warrant exceptiona lly low levels of the federal funds rate for some time”, there were a couple important subtleties in the statement. This was the first time that the Fed admitted downside risk to the inflation outlook. Certainly, the information on prices revealed in the fourth quarter GDP report suggests that price pres- sures are nowhere to be found. And aside from the technicalities that the Fed deliv- ered on ongoing balance sheet policies, there was a lot of interest on what the FOMC had to say about a possible foray into the Treasury market. The statement noted that “the Committee also is prepared to purchase longer-term Treasur y securities if evolving circumstances indicate that such transactions would be particularly effective in im- proving conditions in private credit mar kets.” The key dif- ference in this sentence compared to December is the use of the phrase prepared to buy (in January) compared to evaluating the potential benefits (in December). The change in wording shows that the Fed is getting closer and is simply waiting for the right time. Facilitating liquidity in the market and easing tight credit CONTRIBUTION TO U.S. GDP GROWTH, Q4-2008 1.3 0.1 -0.9 -2.5 -3.8 -5 -4 -3 -2 -1 0 1 2 Non-Farm Inventories Net Trade Residential Inv. Personal Cons. Real GDP Per cent Source: Bureau of Economic Analysis

the recession, the ox and obama

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