[ForexNews]

Look at the extent to which financial conditions have improved since the financial system nearly collapsed in September of last year. Credit spreads have returned to pre-crisis levels. Most banks are still tightening their lending standards but nowhere near what we saw in the aftermath of the Lehman bankruptcy. Equity market volatility has also returned close to pre-Lehman levels.

Speaking of equity markets, the one indicator that has yet to return to pre-
Lehman levels is the S&P 500. One of the reasons equity strategists penciled in a 1,200 target on the S&P 500 over the next 12 months is because the US appears to be in the early stages of a modest but sustainable recovery. We have seen an appreciable improvement across many indicators – jobs, housing, manufacturing, and consumer confidence – now that financial market conditions have, by and
large, normalized.

[ForexNews]

Here is the key statement out of FOMC Chairman Bernanke this week: “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.” We understand the limits of his office, but are surprised that with the recession basically over for three months, Bernanke still will not just come out and say the recession is over. More importantly, the Chairman noted that the economy will remain weak for some time. That is a euphemism for “the output gap will remain exceptionally wide for some time”. So long as the slack in the economy remains sizeable, which is likely given an unemployment rate heading to 10% and capacity utilization still near record lows in 2010, the Chairman is not even going to think about a rate hike. This makes the market’s expectation for four rate hikes in 2010 completely off base. Analysts do not see the Fed hiking until the first quarter of 2011.

[ForexNews]

The OECD released its Composite Leading Indicator and it rose 1.5 points in July to 97.8 in what was the sharpest one-month increase on record. The Leading Indicator is now at its highest level since August, in a sign that the global economy is recovering. The OECD noted that each of the G-7 major economies was in recovery mode, with France and Italy entering a “possible expansion”. In related news, the OECD also reported over the weekend that the unemployment rate across the OECD area remained at 8.5% in July.