Tuesday night’s meeting of the US Federal Reserve was shaping up as the major factor to keep an eye on this week but Friday’s bailout of Bear Stearns, the 5th biggest investment bank, has changed that.
The size of the rate cut from Fed’s meeting will be the focus of the holiday-shortened week. (Most markets around the world closed for Good Friday on March 21, but Asian markets will be mostly open.)
But the rescue of Bear Stearns has renewed fears in financial markets that other groups may be hurt. Bear Stearns produces its latest quarterly figures tonight, our time, to try and convince markets that its in solid condition: except for the sharp loss of liquidity from Wednesday to Thursday night.
Goldman Sachs, Morgan Stanley and Lehman Bros are due to report as well and the problems at Bear Stearns have lifted the importance of these quarterly numbers, their commentary and the outlook.
And then there’s the long weekend: four days in Australia and New Zealand, plus Britain, three days in the US and three or four days in parts of Europe.
It means central banks will have to leave a considerable amount of liquidity in their respective financial systems to help guard against the possibility of more financial problems emerging over such a long period of time (in these volatile days). Bear Stearns problems will mean that more money than was planned last week will have to be left in the system.
The size of the Fed cut is the big question: it probably was half a per cent before Friday’s shock news on Bear Stearns.
Now it’s either 0.75 % (for the second time since January if it happens) or a huge 1% to help reassure markets that the Fed is ahead of the game.
The Fed’s $US400 billion in liquidity moves a week ago on Friday and the second round on Tuesday of last week, failed to save Bear Stearns. The markets obviously want more than reassurance and liquidity, especially in the US where confidence is rattled.
US interest-rate futures on Friday showed more than a 50% chance that the Fed will cut the Federal Funds Rate by 1%.
It’s no longer a case of trying to revive an economy that many say is already in recession: it’s all about providing more assurance to the broader markets.
After Bear Stearns reports tonight, Lehman Brothers and Goldman Sachs will report earnings on Tuesday, followed by Morgan Stanley on Wednesday.
On Friday, Lehman revealed it had renegotiated a new $US2 billion line of credit with 40 lenders. The news was issued after Bear Stearns rescue became public. But the new credit line didn’t stop Lehman shares from suffering the second-biggest fall among investment banks, falling 14.6%, to finish at $US39.26. Spreads on its debt blew out as investors fretted that it might suffer a similar fate to Bear Stearns.
Apart from the Fed meeting and result, the key economic data will be the US Producer Price Index on Tuesday, which may not be as bad after the Consumer Price Index for February was shown to have been lower than forecast.
The PPI was up 7.1% on an annual basis in January, so a fall from that 16 year high will be welcome. But some economists say the February figures for the US CPI understated the impact of higher oil and grain prices which won’t show up until this month.
US economists expect February core PPI to rise 0.2%.
The state of the US economy and its closeness to recession will be explored by tonight’s release of industrial production and capacity utilization figures for last month. While another poor month of new housing figures in February, is expected to be revealed tomorrow night.
For all the problems in the markets the slide in the US housing sector remains the engine of the current crisis.
Here in Australia the major event is the release tomorrow of the minutes from the March Reserve Bank board meeting which boosted interest rates 0.25%.
MONDAY:
Brookfield Multiplex Funds management interim results.
TUESDAY:
RBA March board meeting minutes released.
WEDNESDAY:
US Fed’s interest rate decision 5.15 am; Australian Subscription TV annual conference; ABS figures on dwelling starts for the December quarter and international merchandise imports February; Select Vaccines AGM, Melbourne.
THURSDAY:
ABS figures on new motor vehicle sales for February; Westpac/Melbourne Institute leading index of economic activity for January.
FRIDAY:
Public holiday.
