In the US, the Federal Reserve (Fed) cut the federal funds rate by 50 basis points, more than the 25 basis points we expected, basically sending two messages. Firstly, it expressed growing concern about the life of the US expansion against the backdrop of tightening credit conditions, declining house prices, and a weak August payroll report.Secondly, it signalled a commitment to act pre-emptively to offset these risks. It was this second message that was most clearly heard by markets as following the rate cut US equity prices bounced, credit spreads narrowed, and stress in US money markets was relieved.In the Euro area the macro backdrop has shifted in recent weeks, as headwinds have simultaneously been building from different directions: higher short term interbank rates, tighter credit conditions, currency appreciation, surging oil prices and increasing downside risk for US growth. While the relatively healthy starting point of the Euro area economy would probably have allowed the region to withstand any of these shocks individually, the combination is worrisome.In Japan economic releases for August were expected to improve, since July's weakness had reflected temporary factors like the Chuetsu offshore earthquake and unfavourable weather. August exports and IP (industrial production) did, in fact, rebound, mainly reflecting an auto sector that was forced to cut production in July due to the earthquake.Also, retail sales and household spending rose somewhat at midsummer as weather conditions improved. Of course the downside risk in private consumption lingers, but the pace of increase in net exports and capex was much higher than expected. However, we are not optimistic that the growth trend has genuinely turned positive in the second half of 2007.
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