Well, now for a more accurate valuation of current economic conditions and their relationship to corporate earnings now that the US Federal Reserve has ended the great bailout party by putting rate cuts on hold.
In a sobering example of throwing cold water on an overheating situation, the combination of oil surging above $US135 a barrel in Asian trading, and updated economic forecasts plus confirmation of the hold on rate cuts ended the outbreak of optimism that the worst was over for both markets and perhaps the US economy.
Far from it. From now on every rise in every market, every profit and every gain will be hard won and will be more closely related to what is happening in the real world of business, rather than the airy fairy ‘we see the sunny upturn ahead’ attitude that existed for two months after the Fed bailed out Bear Stearns and convinced the world that it would not let the whole shebang go down the tubes.
Some prescient commentators have wondered what would happen when the US Federal Reserve stopped the rate cutting.
When it was linked to the $US5 surge in oil on one day and the release of the latest forecasts from the Fed for the US economy, it had a dramatic impact on sentiment and markets.
From now on every inflation figure will be watched like a hawk (and probably over-reacted to, of course), every piece of data will be scrutinised minutely, and every big corporate deal and announcement will be examined for its wider impact.
We are now in for months of reactions such as: will they or won’t they increase rates, will the recession be declared now or next month, what’s that mean for unemployment, when will housing steady and how low can prices plunge, rather than just shrugging off the news and awaiting the rebound.
It will come: the Fed sees it happening next year, but before then the US economy has a way to slide yet.
And if this slide is harsher and made worse by inflation, don’t hope for a rebound in 2009: think 2010. The Reserve Bank here is now set on that course.
Wall Street fell again steeply Wednesday on the news from the Fed and another dramatic day in the oil market.
The slump in equities was more than 3% in two days or over 425 points on the Dow, and similar falls for other indices. The Dow was off 227 points on Wednesday night after the 199 point fall on Tuesday.
There was a slight recovery Thursday night as oil prices dipped $US2 a barrel on profit taking. US 10 year Government bonds rose sharply to top 3.91%, the highest close for a while. Inflation, not calamity is now at the top of more investors minds in the US.
The record breaking effort by oil: it rose more than 3% in day’s trading and is up around 16% in the past five days, added to the jolt delivered by the minutes of the last Fed meeting on April 29-30 and its latest economic forecast for the next one to two years.
Oil peaked at $US135.04 in after hours trading in Asia before easing back under the $US135 level. It finished at $US130.81 in New York early friday morning.
Adding to the gloom was a report that Moody’s ratings agency, may have accidentally assigned high-quality ratings to debt products that later lost much of their value.
The Financial Times reported that it had seen documents which said that a computer error had wrongly given higher ratings to debt products that should have been more lowly rated.
The company’s stock was one of the biggest losers on Wednesday, tumbling almost 16%, its worst daily performance in nearly a decade. It fell again Thursday. And in Australia, the Federal Government revealed an official inquiry in the role of credit rating agencies, and investment research houses, especially the kind that did reports on groups like Westpoint.
Our market fell then rose, like a phoenix yesterday, and then eased back. It certainly didn’t follow Wall Street lower, but other markets in the region did it tough for a third day in a row.
The euro was stronger, the US dollar weaker and the Aussie dollar hit a new 25 year high of 96.54 USc in New York just after 4 am, before easing a touch in local trading.
Thursday, the US dollar rose against the euro and the Australian dollar fell below 96 US cents to finish around 95.40.
The Fed said in its minutes that members now expect the economy to shrink in the first half of the year – the clearest indication that the peak economic policymaking group believes the economy is in recession.
"Economic activity was anticipated to be weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008," the minutes read.
That’s as close the Fed has come to admitting the US economy is all but in recession.
The Fed forecast lower growth, higher unemployment and higher inflation for the rest of 2008 and into 2009.
So, no more rate cuts, no growth and higher inflation and no more party punch to keep the ragers going on Wall Street.
It was confirmation of a situation that should have been obvious to a lot of people in the markets, the Bush Administration and investors around the world for the past two months, since Bear Stearns was rescued.
But they all preferred to believe the hype of a rebound in the economy later in the year, or a long shallow climb; inflation was dismissed as being either a temporary thing or under control because core readings showed mild rises in prices. That was wrong.
This week’s core Producer Price rise at double the forecast level for the fastest growth in 17 years was followed last night by the Fed lifting its
