Friday, 8 June 2007

Rising interest rates making headlines

Reuters reports the latest action in bond markets.

U.S. Treasury debt prices collapsed on Thursday as benchmark yields posted their largest one-day spike in three years, spurred by fears of tighter monetary policy worldwide.

The market plunge was initiated by an unlikely source, New Zealand, whose central bank unexpectedly raised rates a day after the European Central Bank hiked rates to curb inflation.

Details on the New Zealand rate hike yesterday, from Bloomberg:

New Zealand's central bank unexpectedly raised its benchmark interest rate a quarter point to a record 8 percent, saying housing demand and consumer spending are fanning inflation. The currency rose to a 22-year high.

"A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures," Reserve Bank Governor Alan Bollard said in Wellington today. A 60 percent surge in world prices of dairy products the past six months has boosted farmers' incomes and will stoke inflation next year, he said.

New Zealand was not the only country raising interest rates yesterday. So did South Africa, as Bloomberg reports:

South Africa's central bank increased its benchmark rate by half a point on concern that rising energy and food prices will push up other costs, threatening to keep inflation above the target range.

The Reserve Bank raised the repurchase rate to 9.5 percent, the first increase since Dec. 7, Governor Tito Mboweni said in a televised speech from Pretoria today. That was in line with the forecasts of 20 of 25 economists surveyed by Bloomberg.

The Bank of England, however, left interest rates unchanged at 5.5 percent yesterday while Brazil and Indonesia cut rates recently to 12.0 percent and 8.5 percent respectively.

The biggest player, however, remains on the sidelines even as the latest US data continue to provide evidence of improvement in the economy. From Reuters:

Fewer U.S. workers signed up for unemployment aid last week, according to the Labor Department. The number of U.S. workers filing initial claims for jobless benefits slipped by 1,000 to 309,000, the department said on Thursday...

A separate report from the Commerce Department on Thursday showed inventories at U.S. wholesalers rose 0.3 percent in April as stocks of nondurable goods saw the biggest percentage increase in five months...

U.S. retail chains on Thursday reported moderate May sales increases as warmer weather fueled demand for seasonal items, like gardening and other outdoor goods, helping retailers rebound from a dismal April.

But consumer credit growth slowed in April, according to another Reuters report.

U.S. consumer credit rose by a smaller-than-expected $2.6 billion in April following a big jump in March that was revised even higher, a Federal Reserve Board report showed on Thursday.

Consumer credit rose at a 1.3 percent annual rate in April to $2.429 trillion, the slowest pace since October 2006, the Fed said. The gain was well below the $6.0 billion consensus increase forecast by Wall Street economists polled by Reuters.

Not surprisingly, stock markets took a mauling yesterday, the S&P 500 losing 26.66 points, or 1.76 percent, to finish at 1,490.72.

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