FYI | Jun 25 2007
By Greg Peel
The Shanghai Composite Index suffered a 3.3% pullback on Friday as investors squared up ahead of the possibility of a weekend rise in interest rates. That rise was not forthcoming, but is nevertheless expected any time soon. China tends to make its moves after close on a Friday, but unlike most central banks that set a regular monetary policy timetable, China can act at the drop of a hat.
Attention has squarely turned to the Fed rate decision due on Thursday. While a rate rise above the current 5.25% is not anticipated, investors will be examining every word of the accompanying Fed statement looking for clues of the committee’s current mindset. When we last tuned in, the Fed saw an economy that was recovering comfortably – which was good news – but it maintained warnings that inflation was still an issue and would be very closely monitored. Wall Street reacted positively last week to the CPI figures that suggested core inflation was well under control. However, not everyone feels comfortable with this assessment.
The core inflation measure is the headline inflation measure minus food and energy. While core inflation rose only 0.1% in May, headline inflation rose 0.7% – the highest jump since September 2005. Food and energy prices are considered volatile and thus misleading in monthly inflation measures. But some Wall Street analysts are looking to surging grain prices (particularly in light of ethanol demand) and constantly rising oil prices and asking: Can food and energy be ignored?
Another inflation measure which is popular with the Fed is the core personal consumption expenditure (PCE) deflator. This is considered to provide a better view of underlying inflation than prices provide. However, this figure for May is released a day after the Fed decision.
If Fed rhetoric were to shift further towards the hawkish, this would not be good news for equity markets. While it is considered that a rate rise is unlikely this year, were the Fed to find the economy stronger and inflation higher than it had anticipated, a rate rise may well eventuate. However, the Fed has a bigger problem to consider in the renewed crisis surrounding the sub-prime mortgage market (See “Wall Street Uncertain On Debt And Taxes”; FYI, Saturday). A rate rise in the short end is not what a perilously balanced debt market needs right now.
Tonight brings existing US home sales for May and Tuesday new home sales. If these figures are poor, they too will impact poorly on the current mortgage crisis. Tuesday also sees June consumer confidence and the Richmond Fed manufacturing index for June. Wednesday brings durable goods orders for May and the FOMC meets.
Thursday is rate decision day accompanied by first quarter GDP and first quarter personal consumption, which will again be indicative of the state of the US economy but too late to influence the Fed. The May help wanted index is also released. Friday then tops out the week with a swag of data: May personal income, construction spending, and core PCE deflator, and the Chicago purchasing managers’ index and Michigan Uni consumer confidence index.
This week in Australia, by comparison, is fairly dull.
Today brings second quarter ABARE commodity prices and tomorrow HIA new home sales for May. Thursday is second quarter job vacancies and Friday RBA credit aggregates.
Around the globe other interesting releases will be Europe’s April current account (Tuesday) and May money supply (Thursday), New Zealand’s first quarter current account (Thursday) and GDP (Friday) and Japan’s May CPI (Friday).
Friday’s global market movements are covered in the aforementioned article from Saturday. Suffice to say the SPI Overnight was down 66 points. The Australian stock market is currently supported by iron ore price upgrades and the ongoing war between Canada and the US (over aluminium). The interesting factor in resources stock valuations at present is the currency consideration. As Iluka (ILU) highlighted last week, are we soon to see an analyst step-up of AUD averages for 2007 and accompanying earnings downgrades in the resources sector? And how will the banks fair this week in the face of the mortgage crisis in the US which saw financials hammered on Wall Street on Friday? Interestingly, there has been a rev-up of low quality mortgage securitisation in Australia. Watch out for more on that later.
