Gold9472
09-16-2007, 10:29 PM
Defining week for markets ahead with D-Day for Fed
http://business.scotsman.com/index.cfm?id=1480722007
BILL JAMIESON
9/16/2007
BE BRACED for a turbo week - as if the past two months have not been turbo-charged enough. Financial markets around the world now face a defining week with key meetings and economic news that will shape responses to the continuing crisis.
Here in the UK, fresh figures are due on inflation. These will determine how much leeway the Bank of England has in interest rate setting in the coming months. There is now a growing expectation that the next move in official interest rates will be down. Indeed, such has been the upward pressure on short-term money market rates in recent weeks that some now expect that the Bank could cut the base rate by the end of the year.
Against a backdrop of intense concern about the crisis that has overtaken Northern Rock and other lenders heavily dependent on wholesale money markets for funds, the Monetary Policy Committee is also due to be grilled on its thinking at a meeting of the Treasury Select Committee.
New inflation data is also due in the US. While previous readings showed a welcome fall, remember that the price of oil has since soared to a record $80 a barrel, while 'soft' commodity prices such as wheat have been hitting new all-time highs. These pressures only add to the worries of the Federal Reserve as it sets interest rate policy in the most febrile conditions.
And on Tuesday the 18th comes D-Day. This is when a long-awaited meeting of the Federal Reserve's interest rate-setting Open Markets Committee will decide on whether to cut interest rates - and by how much. There is a growing expectation that the Fed will announce a 50 basis points cut on Tuesday rather than a more orthodox 25 basis points reduction. Either policy carries risks.
As keenly awaited as the size of the cut will be the statement that accompanies it. No outcome would be worse for the world's biggest central bank than a move in interest rates that fails to elicit the response required - in this case a steadying of nerves and a reassurance to main street America that the credit crisis will not be allowed to pull down the wider economy into recession. The likelihood is that the cut on Thursday will be one of a series that could take the Fed funds rate down to 4% by next year, compared with 5.25% currently.
The situation in the UK is arguably more difficult to address, as no early interest rate decision is pending and there is great uncertainty as to how the liquidity crisis in the wholesale money markets will resolve itself.
There were signs just ahead of the news that Northern Rock had applied for Bank of England assistance that short-term interest rates were coming down. But the Northern Rock revelation has triggered concerns down to street level about which other banks and financial companies will require similar bailouts.
It is also arguable whether remarks by Alistair Darling, the new chancellor, on the need for banks to act prudently have done much to reassure. Clearly some have not acted prudently, and at least some of the lending of recent years has been rash. This was on Gordon Brown's watch, when every boast about sustained economic growth was hailed as another triumph for financial prudence rather than the product of easy credit and a borrowing boom that took the total of household debt to a shattering £1.3 trillion. Such homilies now are rather too late in the day and make light of the wider implications of this turmoil, never mind the concerns of savers - never ever a priority with this government - that their money really is safe.
The combination of a slowdown in mortgage lending and higher mortgage interest rates points to a big slowdown in the UK housing market. Mortgages funded by non bank and building society institutions from the wholesale money market now account for some £26bn of total mortgages in the first half of this year. Citigroup economist Michael Saunders forecasts a 20% fall in turnover next year, with house price growth set to disappear. The August survey from the Royal Institute of Chartered Surveyors last week not only indicated that house prices fell for the first time in almost two years in August but that the forward-looking indicators also pointed to a further loss of momentum in the coming months.
It revealed that the balance of surveyors reporting that house prices rose over the previous three months plunged to minus 1.8% in August from plus 10.8% in July and a peak of plus 47.7% in October last year. The number of new buyer inquiries has also fallen at its fastest rate since August 2004. And looking at the latest sharp falls in the housebuilding sector last Friday, it seems very likely that we're at the start of another slump.
The worry is that this will spill over into the consumer sector and trigger a much wider slowdown. Already, forecasts for economic growth next year have been cut from around 2.8% to 2.1%, with further reductions more than likely.
This would seem to make a compelling case for an interest rate reduction here before long. Indeed, the argument would be even more powerful if the Consumer Price Index data due to be released on Tuesday fulfils expectations of a modest 1.8% year-on-year rise.
The money market crisis shows no sign of easing. And the longer that short-term money rates remain a hundred basis points or so above base rate, the greater the likelihood that the real economy suffers. There are already signs that the crisis in the financial markets is starting to create a new and altogether bleaker regime in the housing market, with particularly adverse consequences for the buy-to-let sector.
As central banks, both in Europe and America have repeatedly stressed, there is no shortage of liquidity. But there is a huge shortage of confidence and trust. It is now up to the Fed this week to cut rates and give confidence a boost.
http://business.scotsman.com/index.cfm?id=1480722007
BILL JAMIESON
9/16/2007
BE BRACED for a turbo week - as if the past two months have not been turbo-charged enough. Financial markets around the world now face a defining week with key meetings and economic news that will shape responses to the continuing crisis.
Here in the UK, fresh figures are due on inflation. These will determine how much leeway the Bank of England has in interest rate setting in the coming months. There is now a growing expectation that the next move in official interest rates will be down. Indeed, such has been the upward pressure on short-term money market rates in recent weeks that some now expect that the Bank could cut the base rate by the end of the year.
Against a backdrop of intense concern about the crisis that has overtaken Northern Rock and other lenders heavily dependent on wholesale money markets for funds, the Monetary Policy Committee is also due to be grilled on its thinking at a meeting of the Treasury Select Committee.
New inflation data is also due in the US. While previous readings showed a welcome fall, remember that the price of oil has since soared to a record $80 a barrel, while 'soft' commodity prices such as wheat have been hitting new all-time highs. These pressures only add to the worries of the Federal Reserve as it sets interest rate policy in the most febrile conditions.
And on Tuesday the 18th comes D-Day. This is when a long-awaited meeting of the Federal Reserve's interest rate-setting Open Markets Committee will decide on whether to cut interest rates - and by how much. There is a growing expectation that the Fed will announce a 50 basis points cut on Tuesday rather than a more orthodox 25 basis points reduction. Either policy carries risks.
As keenly awaited as the size of the cut will be the statement that accompanies it. No outcome would be worse for the world's biggest central bank than a move in interest rates that fails to elicit the response required - in this case a steadying of nerves and a reassurance to main street America that the credit crisis will not be allowed to pull down the wider economy into recession. The likelihood is that the cut on Thursday will be one of a series that could take the Fed funds rate down to 4% by next year, compared with 5.25% currently.
The situation in the UK is arguably more difficult to address, as no early interest rate decision is pending and there is great uncertainty as to how the liquidity crisis in the wholesale money markets will resolve itself.
There were signs just ahead of the news that Northern Rock had applied for Bank of England assistance that short-term interest rates were coming down. But the Northern Rock revelation has triggered concerns down to street level about which other banks and financial companies will require similar bailouts.
It is also arguable whether remarks by Alistair Darling, the new chancellor, on the need for banks to act prudently have done much to reassure. Clearly some have not acted prudently, and at least some of the lending of recent years has been rash. This was on Gordon Brown's watch, when every boast about sustained economic growth was hailed as another triumph for financial prudence rather than the product of easy credit and a borrowing boom that took the total of household debt to a shattering £1.3 trillion. Such homilies now are rather too late in the day and make light of the wider implications of this turmoil, never mind the concerns of savers - never ever a priority with this government - that their money really is safe.
The combination of a slowdown in mortgage lending and higher mortgage interest rates points to a big slowdown in the UK housing market. Mortgages funded by non bank and building society institutions from the wholesale money market now account for some £26bn of total mortgages in the first half of this year. Citigroup economist Michael Saunders forecasts a 20% fall in turnover next year, with house price growth set to disappear. The August survey from the Royal Institute of Chartered Surveyors last week not only indicated that house prices fell for the first time in almost two years in August but that the forward-looking indicators also pointed to a further loss of momentum in the coming months.
It revealed that the balance of surveyors reporting that house prices rose over the previous three months plunged to minus 1.8% in August from plus 10.8% in July and a peak of plus 47.7% in October last year. The number of new buyer inquiries has also fallen at its fastest rate since August 2004. And looking at the latest sharp falls in the housebuilding sector last Friday, it seems very likely that we're at the start of another slump.
The worry is that this will spill over into the consumer sector and trigger a much wider slowdown. Already, forecasts for economic growth next year have been cut from around 2.8% to 2.1%, with further reductions more than likely.
This would seem to make a compelling case for an interest rate reduction here before long. Indeed, the argument would be even more powerful if the Consumer Price Index data due to be released on Tuesday fulfils expectations of a modest 1.8% year-on-year rise.
The money market crisis shows no sign of easing. And the longer that short-term money rates remain a hundred basis points or so above base rate, the greater the likelihood that the real economy suffers. There are already signs that the crisis in the financial markets is starting to create a new and altogether bleaker regime in the housing market, with particularly adverse consequences for the buy-to-let sector.
As central banks, both in Europe and America have repeatedly stressed, there is no shortage of liquidity. But there is a huge shortage of confidence and trust. It is now up to the Fed this week to cut rates and give confidence a boost.