Market News this Week

There’s nothing like a ‘nervous Fed’ to slow the markets down.

The recent meeting minutes that were released have highlighted again, just how fragile the American economy really is. And the Federal Reserve Bank knows it.

And adding to the Fed’s woes is the ever present thorn in its side, Thomas Hoenig, chairman of the Kansas City Federal Reserve Bank. You may be familiar with his name, as he has been the lone ‘dissenter‘ at the past four Fed meetings.

This time, not only has he said that interest rates need to be lifted to 1% in the US, but has also lowered his forecast for 2010 gross domestic product (GDP) to 2.5% – 3%.

That will upset the Fed, as they have the much more optimistic number of 3% -3.5%. It’s interesting to note that these guys have access to the same data, and yet only one of them has a much lower growth figure.

Ultimately, Hoenig does believe that there will be growth and that the delicate American economy should recover. However he just doesn’t support flooding the system with money to fix it.

He’s already been critical of the 0.25% cash rate, believing that leaving the rate low for an extended period will only create another boom and bust cycle. And it’s been suggested that Fed will do more to hurry the recovery along. Something he is completely against.

‘I’ve seen some of those who have advocated purchasing other assets – which industry do you want to favor,’ he said. And he has a point. After bailing out banks, how do you start picking what you want to save next?

‘Monetary policy can’t solve every problem in the United States.’

He’s right too. The Fed flooded the financial system with over USD$1 trillion dollars (AUD $1.13 trillion) during the financial crisis. Clearly the monetary policy isn’t saving the US now, so how can further purchasing of assets fix things?

If it hasn’t bolstered the recovery up to this point, what makes the Fed think that further money shuffling will help?

Hoenig’s comments reached the media two days before the newspapers picked up that the Fed may be seeking other stimulus measures to keep the economy going.

As noted in the Fed’s minutes ‘…the committee would need to consider whether further stimulus might become appropriate if the outlook were to worsen appreciably.’

Jerry Webman, chief economist at OppenheimerFunds said ‘It is not clear to me that the Fed could so anything at about it at this point. They don’t have a lot of levers to pull.’

What are the options for the Fed should they want to pump more money into a failing system? Guarantee bank loans to give car buyers? Ensure lenders provide mortgages? Give every American a ‘free’ Visa preloaded with ‘cash’?

But no matter what measures the Fed may choose to put in place, they can’t force the consumer to spend if they don’t want to.

Chinese growth slows…

Just as the US can’t get growth quick enough, China can’t slow growth soon enough.

Gone are the days when all that mattered were America’s numbers.

And a journalist from the Australian Financial Review has explained this better than anyone else.

‘Policy makers around the world have been focused on China’s economic performance in the hope that it would neutralize the effect of a slowing Europe and fragile US economy’.

The northern hemisphere is so desperate for someone else to be doing better to order to ‘save’ the global economy, that we just keep pinning all our hopes on China. And so far, China has looked like the savoir, but is it sustainable?

Yesterday saw the highly anticipated Chinese GDP came in yesterday, and the 10.3% for the second quarter was lower than the expected 10.5%. Now growth has dropped off for the Chinese economy, as first quarter GDP was 11.9%.

But let’s get one thing straight. A double digit GDP is hardly the death of an economy. Quite simply, it’s still a massive amount of growth. A large number of that due to stimulus of course…

While this does mean the Chinese economy is slowing down, it’s more likely the effects of withdrawing stimulus that we are witnessing. The Chinese central bank has increased lending criteria, and it’s highly likely that at some point this year the Chinese people will face a few, perhaps aggressive, interest rate hikes.

However that financial markets seem to forget, when they over react to the ‘news’, is that China could have created one big messy bubble for itself, so it had to slow down.

Have they put the brakes on the economy soon enough? Only time will tell…

And finally don’t be surprised to hear of all the retailers crying out ‘no more’ when it comes to interest rate rises.

Oh yes, our lack of spending is being blamed on those six interest rate rises from the Reserve Bank of Australia, or so says a director from the Australian Retailers Association.

The latest Australian Bureau of Statistics data showed that retail sales at major department stores dropped 5.8%.

What does that mean? Well, we’re just not spending as much.

Apparently some retailers are finding their business models ‘unsustainable’ because of all of the ‘skinny margins’. Which is simply a nicer way of saying shops are constantly on sale and they aren’t making as much cash as they were previously.

A particular group which represents retailers have said that poor sales in Australia are just a ‘delayed reaction to the global financial crisis’.

No, it’s not a delayed reaction, it’s just that we aren’t spending our Rudd money – sorry, ‘stimulus’ money anymore.

Our retailers were all reporting surprisingly results for nearly twelve months after the dreaded ‘GFC’, however now that the stimulus has all dried up, people are back to paying off debt rather than loading up on it again.

And clearly, the retail industry doesn’t like that.

There is an upside of the almost permanent sales cycle for consumers. For those few who are choosing to spend their money, you should be able to pick a few bargains.

Now let’s have a look what happened on the market’s yesterday…

Yesterday the S&P/ASX 200 closed to 4,442.60, lower by 19 points. Surprisingly, the market has opened higher his morning after the last minute surge from the US.

At one points last night, the Dow Jones Industrial Average was 100 points down. The index spent most of the day in the red after JP Morgan Chase & Co had a very somber outlook on the economy. For the first time in twelve months manufacturing output fell for June.

The Dow managed to climb back and finish the session only 7 points down, to 10,359.31.

Shares in BP [NYSE: BP] gained over 7% last night during the US trading session as news that oil spill in the Gulf of Mexico has been temporarily plugged.

The FTSE was lower overnight on fears that the economic recovery is slowing after US manufacturing data was released. BP in the UK, [LON: BP] received another boost, adding 8% to the shares price.

The Footsie closed down by 42 points to 5,211.29.

The Nikkei ended the day at 9,685.53, lower by 109 points.

The price of spot gold in Australian dollars is trading at $1,370.82 while in US Dollars it is trading 1,208.94. The price of silver in Aussie dollars is $20.76 and in US Dollars it is $18.31.

The Aussie dollar versus the US dollar was USD$0.8827, and gained against the Japanese Yen JPY77.17

Crude Oil closed at USD$77.10.

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

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