Tuesday 31 July 2007

No Bernanke put?

As markets steadied somewhat yesterday, John Berry says in his Bloomberg column that the recent market volatility will not induce a rate cut from the Fed.

It's going to take more than the recent bout of volatility in stock and bond markets to change the outcome of next week's Federal Reserve policymaking meeting...

Neither the recent drop in stock prices nor the rise in yields on riskier debt has gone far enough to cause Fed officials to alter their forecast for continued moderate growth in this year's second half.

In her Bloomberg column, Caroline Baum finds someone else saying essentially the same thing.

"In the last 48 hours, the fed funds futures had the biggest change in outlook for Fed policy in months," Jim Bianco, president of Bianco Research in Chicago, said in a phone interview Friday...

"It's right out of the Greenspan playbook," Bianco said...

"The definition of a crisis in the Greenspan era was any market environment preventing a trader from getting 100 percent of his bonus potential,'' Bianco said...

At times like these, it's important to remember that "Greenspan is no longer Fed chairman," Bianco said. "It's a dirty little secret that not too many people know."

And David Kotok of Cumberland Advisors says:

... [T]he risk is centered in the private sector with hedge funds, private equity firms, carry traders and other leveraged players. This time the brokers and underwriters and credit insurers are taking the hits...

In the Fed’s view they took risks and they must incur losses if they erred...

In our view the Fed will not bail out the brokers, insurers, and other players who extended or leveraged or rated (S&P better watch their back) credit. The Fed will watch. It will be vigilant about the banking system. But it has no obligation to save a builder who is over extended or a condo flipper or a hedge fund.

Meanwhile, even as we assess the likelihood of a Fed cut, some central banks continue to tighten monetary policy -- for example, China's. Xinhua Online reports:

China will raise the reserve requirement ratio by half a percentage point to 12 percent for commercial banks from Aug. 15, the People's Bank of China (PBOC) announced on Monday.

In the UK, the prospect for further monetary tightening is less clear. Reuters reports:

Mortgage lending growth gathered pace in June and approvals for home loans held steady in a sign that a string of interest rate rises has not cooled the housing market...

The latest survey from mortgage lender Nationwide showed house prices virtually stagnated this month but were still up nearly 10 percent on the year. Data from property consultants Hometrack earlier on Monday also showed house price inflation slowing...

Unsecured lending rose by 874 million pounds last month...

M4, or broad money, increased by 0.7 percent in June for an annual rate of 12.9 percent...

And while many economists expect the Bank of Japan to raise interest rates in the next month or two, recent economic data still cannot convincingly justify such a move.

Date released yesterday showed that Japanese industrial production rose 1.2 percent in June. On the other hand, the NTC Research/Nomura/JMMA Purchasing Managers Index declined to 49.0 in July from 50.4 in June.

Labour and consumer spending data released today did not greatly clarify the economic outlook. From Bloomberg:

Monthly wages, including overtime pay and bonuses, dropped 1.1 percent from a year earlier, the Labor Ministry said today in Tokyo. Spending rose 0.1 percent from a year earlier, the statistics bureau said today in Tokyo, less than the 0.7 percent median estimate of 29 economists surveyed by Bloomberg News...

The drop in wages came even as the unemployment rate sank to 3.7 percent in June, the lowest in nine years, from 3.8 percent in May. The job-to-applicant ratio, which shows how many positions are on offer to a job seeker, rose to 1.07 in June from 1.06 a month earlier.

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