Friday, July 01, 2005
US interest rates rise to 3.25 per cent
The U.S. Federal Reserve, keeping a watchful eye on the impact of surging oil prices, raised it's key interest rate by another quarter point yesterday. The action pushed the federal funds rate up to 3.25 per cent.
It marked the ninth increase in the interest that banks charge each other on overnight loans and left this benchmark rate at its highest level since August 2001. When the Fed started its credit tightening campaign a year ago, the funds rate had been at a 46-year low of one per cent.
In its announcement of the decision, the Fed retained a pledge it has been making for the past year to move rates up "at a pace that is likely to be measured," a phrase that has been read by financial markets as signalling continued quarter-point moves in the future.
The decision by Federal Reserve chairman Alan Greenspan and his colleagues came as the economy is growing at a solid pace even though it is being buffeted by rising oil prices, which earlier this week hit a record high above $60 US per barrel.
The Fed's statement said even with the rise in energy prices, the economy has continued to grow at a respectable pace.
"Although energy prices have risen further, the expansion remains firm and labour market conditions continue to improve gradually," the statement said.
Commercial banks were expected to follow the Fed's rate increase with a matching quarter- point boost in their prime lending rates.
Private economists predicted that the Fed will raise rates again in August, given there was no sign in the statement that the central bank was about to pause in its credit-tightening efforts.
Wall Street investors, disappointed at the prospect of continued rate increases, sent stocks tumbling after the Fed announcement. The Dow Jones industrials lost 99.51 points to close at 10,274.97.
The government reported on Wednesday that the overall economy grew at a healthy rate of 3.8 per cent in the first three months of this year and many analysts believe growth in the current quarter will be only slightly slower than that pace.
The Fed said that pressures on inflation "have stayed elevated" but repeated a belief it has made in past statements that "longer-term inflation expectations remain well contained."
That phrase is seen by markets as a signal that the Fed feels no need to accelerate its rate hikes.
Greenspan, testifying to the U.S. Congress recently, described the economy as staying on a "reasonably firm footing" with inflation under control.
While consumer prices had jumped sharply in March and April, they actually declined for the first time in 10 months in May, reflecting a big plunge in energy prices.
The continued good performance of inflation, outside of energy, has allowed the Fed to nudge rates higher in small steps. The Fed is moving rates up from the historic lows in effect during a time when the central bank was trying to jump-start the economy following the 2001 recession.
The Fed's goal is to push the funds rate up to a neutral level where it is neither stimulating the economy nor holding back business growth. Many economists believe that calls for a funds level of around 4.25 per cent, which could be reached by the end of the year if the Fed keeps boosting rates by a quarter-point at its August, September, November and December meetings.
However, some analysts believe the Fed will pause at some point, possibly after the August increase, to assess how the rate hikes are affecting the economy.
The Fed's short-term rate increases normally produce an increase in long-term rates, which are set by financial markets. However, that hasn't occurred during this cycle of increases. Treasury's benchmark 10-year bond was at 4.8 per cent a year ago and now is around four per cent.
The decline in long-term rates has kept mortgage rates at historic lows this year and has been a major contributor in the USA's red- hot housing market. Sales of both new and existing homes are expected to hit record highs for a fifth straight year.
Some economists have begun to worry that a speculative bubble is developing in housing that will eventually burst like the stock market bubble did at the beginning of this decade. While Greenspan has talked about "froth" in local markets he has discounted concerns that a national housing bubble is developing.
Many economists believe that mortgage rates should begin rising gradually as the Fed keeps pushing short-term rates higher. They are forecasting 30-year fixed-rate mortgages around 6.5 per cent by the end of this year, up about one percentage point from current rates.
The 30-year mortgage dropped to 5.53 per cent this week, according to a Freddie Mac survey, the lowest level in more than a year.
It marked the ninth increase in the interest that banks charge each other on overnight loans and left this benchmark rate at its highest level since August 2001. When the Fed started its credit tightening campaign a year ago, the funds rate had been at a 46-year low of one per cent.
In its announcement of the decision, the Fed retained a pledge it has been making for the past year to move rates up "at a pace that is likely to be measured," a phrase that has been read by financial markets as signalling continued quarter-point moves in the future.
The decision by Federal Reserve chairman Alan Greenspan and his colleagues came as the economy is growing at a solid pace even though it is being buffeted by rising oil prices, which earlier this week hit a record high above $60 US per barrel.
The Fed's statement said even with the rise in energy prices, the economy has continued to grow at a respectable pace.
"Although energy prices have risen further, the expansion remains firm and labour market conditions continue to improve gradually," the statement said.
Commercial banks were expected to follow the Fed's rate increase with a matching quarter- point boost in their prime lending rates.
Private economists predicted that the Fed will raise rates again in August, given there was no sign in the statement that the central bank was about to pause in its credit-tightening efforts.
Wall Street investors, disappointed at the prospect of continued rate increases, sent stocks tumbling after the Fed announcement. The Dow Jones industrials lost 99.51 points to close at 10,274.97.
The government reported on Wednesday that the overall economy grew at a healthy rate of 3.8 per cent in the first three months of this year and many analysts believe growth in the current quarter will be only slightly slower than that pace.
The Fed said that pressures on inflation "have stayed elevated" but repeated a belief it has made in past statements that "longer-term inflation expectations remain well contained."
That phrase is seen by markets as a signal that the Fed feels no need to accelerate its rate hikes.
Greenspan, testifying to the U.S. Congress recently, described the economy as staying on a "reasonably firm footing" with inflation under control.
While consumer prices had jumped sharply in March and April, they actually declined for the first time in 10 months in May, reflecting a big plunge in energy prices.
The continued good performance of inflation, outside of energy, has allowed the Fed to nudge rates higher in small steps. The Fed is moving rates up from the historic lows in effect during a time when the central bank was trying to jump-start the economy following the 2001 recession.
The Fed's goal is to push the funds rate up to a neutral level where it is neither stimulating the economy nor holding back business growth. Many economists believe that calls for a funds level of around 4.25 per cent, which could be reached by the end of the year if the Fed keeps boosting rates by a quarter-point at its August, September, November and December meetings.
However, some analysts believe the Fed will pause at some point, possibly after the August increase, to assess how the rate hikes are affecting the economy.
The Fed's short-term rate increases normally produce an increase in long-term rates, which are set by financial markets. However, that hasn't occurred during this cycle of increases. Treasury's benchmark 10-year bond was at 4.8 per cent a year ago and now is around four per cent.
The decline in long-term rates has kept mortgage rates at historic lows this year and has been a major contributor in the USA's red- hot housing market. Sales of both new and existing homes are expected to hit record highs for a fifth straight year.
Some economists have begun to worry that a speculative bubble is developing in housing that will eventually burst like the stock market bubble did at the beginning of this decade. While Greenspan has talked about "froth" in local markets he has discounted concerns that a national housing bubble is developing.
Many economists believe that mortgage rates should begin rising gradually as the Fed keeps pushing short-term rates higher. They are forecasting 30-year fixed-rate mortgages around 6.5 per cent by the end of this year, up about one percentage point from current rates.
The 30-year mortgage dropped to 5.53 per cent this week, according to a Freddie Mac survey, the lowest level in more than a year.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:04 AM 0 comments
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Thursday, June 30, 2005
Bank of England's interest rates review
These are a summary of the minutes of the Bank of England's Monetary Policy Committee meeting held on 8 and 9 June 2005.
The immediate policy decision
The news on UK-weighted world demand had been slightly on the downside over the past month – with prospects for the euro area looking a little weaker than expected at the time of the Inflation Report, although growth in the United States remained stable. In the United Kingdom, GDP growth in 2005 Q1 had been revised down, broadly as expected at the previous meeting following the weak March industrial production data. The latest indicators, particularly CIPS services, pointed to output growth continuing to be close to trend in Q2.
A succession of weaker surveys suggested that, on balance, the risks to the near-term Inflation Report output projection were perhaps slightly more to the downside. But those surveys tended to be drawn largely from manufacturing. There were fewer indicators on the stronger, and much larger, service sectors – where analysis continued to be heavily reliant on the CIPS services survey. In terms of expenditure, the latest data and surveys had also highlighted the risk that investment and export growth, taken together, might not fill the gap left by slower consumption growth. But more evidence was needed on the volatile investment and trade
components of GDP, and the Quarterly National Accounts and annual Blue Book data were due to be published shortly.
There was little news on labour market quantities, and what news there was hinted at a slight
easing of labour market conditions. Regular pay growth had slowed. Import prices in Q1 had risen broadly as expected. There were some signs of an easing in the rate of increase in input and output prices in both the official data and surveys. Earlier increases in prices were moving further along the supply chain into the distribution sector. Consumer price inflation remained close to target and there had been no significant news in the April and May outturns.
For most members, the evidence warranted no change in official interest rates this month. There were a variety of arguments, on which different members placed different weights. For those members, although recent indicators pointed to slightly weaker growth in the near term, the outlook for inflation had not changed sufficiently since the May Inflation Report to justify a change in interest rates.
The two most important risks identified in the May Report had concerned the outlook for consumption and the reasons for the rise in CPI inflation. Both of these risks remained unresolved.
Although there was no new information on the latter, on the former there were signs that household spending growth might have stabilised, albeit at a low rate. The indicators did not provide conclusive evidence of whether the slowdown in consumption was a temporary adjustment, concentrated primarily in durables and semi-durables spending, or whether this was the beginning of a wider slowdown in private sector spending. So there was not enough evidence to decide between the competing hypotheses discussed at the previous meeting, nor to move away from the central projection made at the time of the Inflation Report.
There had been a fall in market interest rate expectations over the past month. That amounted to a loosening of monetary conditions and would consequently tend to support activity. But there was time to gather further evidence on the depth and extent of the slowdown in consumption to see if lower interest rates were warranted. A reduction in interest rates at this juncture would be a significant surprise, and would run the risk of the inference being drawn that the Committee believed that the situation had deteriorated more than it, in fact, thought.
And if the latest consumption indicators, in fact, presaged a return to stronger domestic demand growth, a reduction in rates now might accelerate the recovery in consumption growth and lead to inflationary pressures.
For some other members, the evidence over the past month was enough to warrant a reduction in interest rates of 25 basis points this month. The further weakness in the euro area pointed to weaker UK-weighted world demand. Domestically, the composition of GDP growth in Q1, together with the latest monthly indicators, a slowdown in unsecured lending and tighter credit conditions, amounted to some downside news to the outlook for activity. Nominal GDP growth had been slowing, while the labour market had shown signs of easing.
This, and the recent slowing of producer price inflation, suggested that demand pressures were less than previously thought. As a result, it now seemed more likely that much of the recent increase in inflation had reflected higher oil and other commodity prices passing through the supply chain, rather than the pressure of excess demand on supply capacity.
Although output growth had so far been fairly resilient in the face of weaker consumption, GDP
growth was likely to be weaker than in the May Inflation Report central projection, notwithstanding the shift in market interest rates. Inflation might therefore be below target in the medium term. While there were arguments in favour of waiting for more information before taking action, that risked the slowdown in consumption becoming more entrenched. A small reduction in rates now might obviate the need for a larger reduction in interest rates at a later date.
The Governor invited members to vote on the proposition that the repo rate should be maintained at 4.75%. Seven members of the Committee (the Governor, Rachel Lomax, Sir Andrew Large, Kate Barker, Richard Lambert, Stephen Nickell, and Paul Tucker) voted in favour. Two members of the Committee (Charles Bean and Marian Bell) voted against, preferring a reduction in the repo rate of 25 basis points.
They are also available at:
(http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2005/mpc0506.pdf).
The immediate policy decision
The news on UK-weighted world demand had been slightly on the downside over the past month – with prospects for the euro area looking a little weaker than expected at the time of the Inflation Report, although growth in the United States remained stable. In the United Kingdom, GDP growth in 2005 Q1 had been revised down, broadly as expected at the previous meeting following the weak March industrial production data. The latest indicators, particularly CIPS services, pointed to output growth continuing to be close to trend in Q2.
A succession of weaker surveys suggested that, on balance, the risks to the near-term Inflation Report output projection were perhaps slightly more to the downside. But those surveys tended to be drawn largely from manufacturing. There were fewer indicators on the stronger, and much larger, service sectors – where analysis continued to be heavily reliant on the CIPS services survey. In terms of expenditure, the latest data and surveys had also highlighted the risk that investment and export growth, taken together, might not fill the gap left by slower consumption growth. But more evidence was needed on the volatile investment and trade
components of GDP, and the Quarterly National Accounts and annual Blue Book data were due to be published shortly.
There was little news on labour market quantities, and what news there was hinted at a slight
easing of labour market conditions. Regular pay growth had slowed. Import prices in Q1 had risen broadly as expected. There were some signs of an easing in the rate of increase in input and output prices in both the official data and surveys. Earlier increases in prices were moving further along the supply chain into the distribution sector. Consumer price inflation remained close to target and there had been no significant news in the April and May outturns.
For most members, the evidence warranted no change in official interest rates this month. There were a variety of arguments, on which different members placed different weights. For those members, although recent indicators pointed to slightly weaker growth in the near term, the outlook for inflation had not changed sufficiently since the May Inflation Report to justify a change in interest rates.
The two most important risks identified in the May Report had concerned the outlook for consumption and the reasons for the rise in CPI inflation. Both of these risks remained unresolved.
Although there was no new information on the latter, on the former there were signs that household spending growth might have stabilised, albeit at a low rate. The indicators did not provide conclusive evidence of whether the slowdown in consumption was a temporary adjustment, concentrated primarily in durables and semi-durables spending, or whether this was the beginning of a wider slowdown in private sector spending. So there was not enough evidence to decide between the competing hypotheses discussed at the previous meeting, nor to move away from the central projection made at the time of the Inflation Report.
There had been a fall in market interest rate expectations over the past month. That amounted to a loosening of monetary conditions and would consequently tend to support activity. But there was time to gather further evidence on the depth and extent of the slowdown in consumption to see if lower interest rates were warranted. A reduction in interest rates at this juncture would be a significant surprise, and would run the risk of the inference being drawn that the Committee believed that the situation had deteriorated more than it, in fact, thought.
And if the latest consumption indicators, in fact, presaged a return to stronger domestic demand growth, a reduction in rates now might accelerate the recovery in consumption growth and lead to inflationary pressures.
For some other members, the evidence over the past month was enough to warrant a reduction in interest rates of 25 basis points this month. The further weakness in the euro area pointed to weaker UK-weighted world demand. Domestically, the composition of GDP growth in Q1, together with the latest monthly indicators, a slowdown in unsecured lending and tighter credit conditions, amounted to some downside news to the outlook for activity. Nominal GDP growth had been slowing, while the labour market had shown signs of easing.
This, and the recent slowing of producer price inflation, suggested that demand pressures were less than previously thought. As a result, it now seemed more likely that much of the recent increase in inflation had reflected higher oil and other commodity prices passing through the supply chain, rather than the pressure of excess demand on supply capacity.
Although output growth had so far been fairly resilient in the face of weaker consumption, GDP
growth was likely to be weaker than in the May Inflation Report central projection, notwithstanding the shift in market interest rates. Inflation might therefore be below target in the medium term. While there were arguments in favour of waiting for more information before taking action, that risked the slowdown in consumption becoming more entrenched. A small reduction in rates now might obviate the need for a larger reduction in interest rates at a later date.
The Governor invited members to vote on the proposition that the repo rate should be maintained at 4.75%. Seven members of the Committee (the Governor, Rachel Lomax, Sir Andrew Large, Kate Barker, Richard Lambert, Stephen Nickell, and Paul Tucker) voted in favour. Two members of the Committee (Charles Bean and Marian Bell) voted against, preferring a reduction in the repo rate of 25 basis points.
They are also available at:
(http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2005/mpc0506.pdf).
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:34 AM 0 comments
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Monday, June 27, 2005
Interest rate traders prepare for Fed comments
Thursday 30th June's trading on Wall Street ought to come with a warning- not for the faint of heart.
In the space of a few hours, the Federal Reserve will announce its latest policy on the nation's interest rates, and institutional traders - the big banks that run mutual funds, hedge funds and other investment vehicles - will react accordingly before the 4 p.m. close, attempting to strike the right balance between boosting their end-of-quarter returns and planning for future rate hikes.
This will likely result in heavy volume and wide swings in individual stock prices in the final hours of trading Thursday. But ultimately, those swings may not mean anything to investors holding stocks for the medium- to long-term, so a certain amount of forbearance, and intestinal fortitude, may be required.
However, "volatile" may not necessarily equal "bad." The Fed is likely to raise the nation's benchmark interest rate by another quarter percentage point to 3.25 percent, but could change its closely watched policy statement. If it does - and if the change signals an upcoming pause in rate hikes - the market could rally.
For the rest of the week, oil will remain a major concern for most investors amid only a handful of important earnings reports and economic data. Crude oil futures topped $60 per barrel for the first time on Thursday, causing the stock market to plummet for two straight sessions. For the week, the Dow Jones industrial average lost 3.06 percent, the Standard & Poor's 500 fell 2.09 percent, and the Nasdaq composite index dropped 1.76 percent.
ECONOMIC DATA
After the volatility of Thursday, Friday's trading may signal the market's short-term direction, thanks to the ISM Index. The Institute for Supply Management measures the health of the nation's manufacturing sector, and its index for June, which comes out Friday morning, is expected to come in at 51.5, a slight increase from May's 51.4 reading.
A few other reports could move the markets earlier in the week, oil notwithstanding. The Conference Board's consumer confidence index, due Tuesday, is expected to improve to 104.1 in June, up from 102.2 in May. However, that expectation may have been made before oil prices surged last week, so a surprise on the negative side could occur.
On Wednesday, the Commerce Department will release its final figures for the first quarter's gross domestic product growth. GDP was expected to rise at an annual rate of 3.7 percent, up from previous first-quarter estimates of 3.5 percent.
EARNINGS
The technology sector could see some movement Wednesday as software maker Oracle Corp. reports its quarterly earnings before the session. Oracle is expected to earn 23 cents per share, up from 19 cents per share in the year-ago quarter. The company's stock is up 28.1 percent from its 52-week low of $9.78 on Aug. 12, 2004, closing Friday at $12.50.
Sporting goods maker Nike Inc. has had a more volatile ride, trading between $68.61 and $92.43 over the last year and closing Friday at $89.35. Wall Street analysts expect Nike to earn $1.28 per share, up from $1.13 per share a year ago, when it reports its earnings Monday morning.
EVENTS
The Fed's Open Market Committee is expected to issue its statement on interest rates at 2:15 p.m. EDT Thursday. The second quarter officially ends at 4 p.m. that day.
On Friday, automakers will be releasing their monthly sales data, which can move auto stocks a great deal.
In the space of a few hours, the Federal Reserve will announce its latest policy on the nation's interest rates, and institutional traders - the big banks that run mutual funds, hedge funds and other investment vehicles - will react accordingly before the 4 p.m. close, attempting to strike the right balance between boosting their end-of-quarter returns and planning for future rate hikes.
This will likely result in heavy volume and wide swings in individual stock prices in the final hours of trading Thursday. But ultimately, those swings may not mean anything to investors holding stocks for the medium- to long-term, so a certain amount of forbearance, and intestinal fortitude, may be required.
However, "volatile" may not necessarily equal "bad." The Fed is likely to raise the nation's benchmark interest rate by another quarter percentage point to 3.25 percent, but could change its closely watched policy statement. If it does - and if the change signals an upcoming pause in rate hikes - the market could rally.
For the rest of the week, oil will remain a major concern for most investors amid only a handful of important earnings reports and economic data. Crude oil futures topped $60 per barrel for the first time on Thursday, causing the stock market to plummet for two straight sessions. For the week, the Dow Jones industrial average lost 3.06 percent, the Standard & Poor's 500 fell 2.09 percent, and the Nasdaq composite index dropped 1.76 percent.
ECONOMIC DATA
After the volatility of Thursday, Friday's trading may signal the market's short-term direction, thanks to the ISM Index. The Institute for Supply Management measures the health of the nation's manufacturing sector, and its index for June, which comes out Friday morning, is expected to come in at 51.5, a slight increase from May's 51.4 reading.
A few other reports could move the markets earlier in the week, oil notwithstanding. The Conference Board's consumer confidence index, due Tuesday, is expected to improve to 104.1 in June, up from 102.2 in May. However, that expectation may have been made before oil prices surged last week, so a surprise on the negative side could occur.
On Wednesday, the Commerce Department will release its final figures for the first quarter's gross domestic product growth. GDP was expected to rise at an annual rate of 3.7 percent, up from previous first-quarter estimates of 3.5 percent.
EARNINGS
The technology sector could see some movement Wednesday as software maker Oracle Corp. reports its quarterly earnings before the session. Oracle is expected to earn 23 cents per share, up from 19 cents per share in the year-ago quarter. The company's stock is up 28.1 percent from its 52-week low of $9.78 on Aug. 12, 2004, closing Friday at $12.50.
Sporting goods maker Nike Inc. has had a more volatile ride, trading between $68.61 and $92.43 over the last year and closing Friday at $89.35. Wall Street analysts expect Nike to earn $1.28 per share, up from $1.13 per share a year ago, when it reports its earnings Monday morning.
EVENTS
The Fed's Open Market Committee is expected to issue its statement on interest rates at 2:15 p.m. EDT Thursday. The second quarter officially ends at 4 p.m. that day.
On Friday, automakers will be releasing their monthly sales data, which can move auto stocks a great deal.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 3:31 PM 0 comments
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