Wednesday, 21 September 2005

Fed hikes rates as indicators give mixed picture

As expected -- and despite Hurricane Katrina -- the Federal Open Market Committee decided yesterday to raise its target for the federal funds rate by 25 basis points to 3.75 percent. Among the econ bloggers who analysed the FOMC statement, William Polley thinks that the "changes in the wording were stronger in some ways than I would have anticipated and not as strong in others", but "is very consistent with...the possibility that the eventual target...for the funds rate is inching up".

But Katrina does seem to be affecting the economy nevertheless. Reuters reports:

Chain store retail sales dropped significantly in the latest week as a result of high gasoline prices, ripple effects from Hurricane Katrina and increased consumer concern about the future of the economy, reports said on Tuesday.

Sales slid 2.1 percent in the week ended September 17, compared with 0.2 percent decline the previous week -- the largest weekly dip since December 6, 2003 when the index fell 2.5 percent, the International Council of Shopping Centers and UBS said in a joint report...

The falling index follows last week's dip in U.S. consumer confidence as the ABC News/Washington Post Consumer Comfort Index fell to -20...

Separately, Redbook Research said sales in September to date were up 0.4 percent versus the same period in August compared with from last week's 0.5 percent increase...

And the US housing market, which the Fed is undoubtedly concerned with, may be softening as well. Following the report on Monday that the National Association of Home Builders/Wells Fargo Housing Market Index declined two points in September to a score of 65, the lowest since July 2003 and the third consecutive month of declines since June's 72 reading, yesterday, the Commerce Department reported that housing starts dropped by a larger-than-expected 1.3 percent in August to a 2.009 million unit annual rate, down from July, which saw starts revised down to a 2.035 million unit pace from an originally-reported 2.042 million unit pace, while permits for future groundbreaking fell 2.2 percent to a 2.124 million unit pace.

On the other hand, the UK housing market appears to have hit a trough. Rightmove reported that house prices fell in August, but sales rose. Similarly, the Royal Institution of Chartered Surveyors said house prices fell at the slowest pace in almost a year in August, while enquiries from new buyers rose at its fastest rate since January 2004. And yesterday, the British Bankers' Association said that mortgage lending picked up in August.

In Canada, strong housing demand was among the components that helped propel the composite leading indicator to a 0.3 percent gain in August, the same as in July, even though housing starts fell for the month.

Germany, on the other hand, saw investor confidence weakening in September, the ZEW index falling to 38.6 from 50 in August. The standoff between Christian Democratic Union leader Angela Merkel and Chancellor Gerhard Schroeder after the weekend election is believed to have contributed to the weaker sentiment. On Monday, the HWWA institute in Hamburg had reduced its 2005 growth forecast for Germany by 0.1 percentage point to 0.6 percent and its 2006 projection to 1 percent from 1.3 percent.

This seems to validate Edward Hugh's assessment of Germany's economy, of which he is no more optimistic than Japan's, demographics being an important consideration.

And speaking of demographics, Hugh has just added another to a series of posts on demographics and savings, this time on Taiwan, with conclusions that may have ramifications on the much-discussed issue of global rebalancing.

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