FYI | Aug 04 2007
By Greg Peel
US interest rate markets are now beginning to factor in a rate cut in October, and possibly one or even two more after that. Forget inflation. The mortgage crisis simply must ultimately prove a crimp on US spending and already signs from June data are suggesting the apparent reacceleration of the US economy may well have been a false dawn. This should be enough to encourage the Fed into easing monetary policy for the first time since seventeen consecutive hikes. But moreover, a wounded and bleeding Wall Street is screaming out for the Fed to flush liquidity into a system which is rapidly crumbling.
The Fed has already indicated it will not “rescue” Wall Street. The reversal of mispriced risk and extensive leverage is only a good thing for the economy in the long run, and if a few hedge funds go under then so be it. So no one expects the Fed to hike on Tuesday night. The market is now beginning to anticipate, however, that cuts will need to be forthcoming soon as the economy begins to weaken under the burden of the mortgage crisis. The problem is that were the Fed to ease, the US dollar would surely collapse.
In Australia, there are few left standing who believe the RBA will not raise rates on Wednesday, given the weight of recent hawkish economic data. The RBA will make its decision irrespective of a falling stock market, as it is not the RBA’s brief to be concerned by stock market corrections. The raise will also come regardless of the US mortgage crisis bringing into question the record levels of Australian household debt. The RBA will need to see signs of a slowing global economy before it would change its perception.
The US will see the release of more important economic data this week, although as nearly all of it is June data and hence its significance is now undermined. This won’t, however, stop the stock market reacting. Tuesday brings second quarter non-farm productivity and unit labour costs as well as June consumer credit (and the rate decision). Wednesday sees June wholesale inventories, and Friday July import prices.
In Australia, the ANZ will release its latest job ad figures on Monday. Wednesday brings second quarter house prices and June investment lending (and the rate decision). There will be a good deal of anticipation for Thursday’s employment numbers for June, although the RBA will have already made its move.
There are a raft of interim and full-year results being released this week, all of which appear in the FNArena calendar.