November 23rd, 2007 - Archived Economic Forecast
Investment Policy Committee Newsletter
More than two years into a housing downturn, the U.S. economy is starting to confront broader challenges to continued expansion. Overall growth has remained on a healthy track throughout 2007 (3.9% quarter over quarter growth released last month) with no sign of spillover from housing to consumers. Despite solid fundamentals, however, the expansion’s resilience is being tested as stresses on the financial system have emerged in the wake of the market turmoil that began around midyear.
Our forecast is for a continuing slowing of the US economy for the next six months and more rate cuts despite the Dollar’s weakness. While chances of a recession have risen, we feel that as long as the annualized growth rate does not drop below 1% we do not think it will have a material impact on the global economy.
Across the pond, the UK is also experiencing a downturn in the housing market. We feel that this will cause the economy to slow quickly as the housing crisis of the late 1980s remains fresh on most peoples minds.
Interest Rates (We feel the following banks will cut rates in the near future):
| US | The US Federal Reserve will likely continue to cut rates at each of the next four meetings as the market is now pricing in 3.50% short term rates by the middle of 2008 (4.50% now) |
|---|---|
| UK | The UK voted 7-2 to keep rates steady at 5.75% on November 8th with the direction of the dissenters being to cut rates. We feel the growing credit and housing crunch will force the bank to cut rates as soon as the December 5th meeting. |
| Canada | Canada: The Bank of Canada has increasingly cited downside risks to its forecast setting the stage for rate cuts. With the Canadian Dollar exerting a greater drag than the central bank expected and inflation trending lower, we feel there will be 25 basis point cuts on December 4th and again on January 22nd. |
| Asset Class | Geographic Focus | Currencies | |||
|---|---|---|---|---|---|
| Equities | 41.0% | North America | 46.8% | US Dollar | 46% |
| Bonds | 38.0% | Europe (ex-UK) | 24.0% | Euro Bloc | 31% |
| Hedge Fund | 14.5% | United Kingdom | 10.0% | UK Sterling | 0% |
| Cash | 2.5% | Japan | 8.0% | JPN Yen | 12% |
| Commodities | 4.0% | Pacific (ex-Japan) | 5.4% | Swiss Francs | 7% |
| Emerging | 5.8% | Dollar Bloc | 4% | ||
These recommendations are targets and do not represent specific trade ideas. Not suitable for all investors. For further information call LOM Asset Management Limited or your local Relationship Manager.
