To the US Fed, inflation is the main problem, although it isn’t fully discounting the continuing dangers from the weak US economy or the dangers from the credit crunch.
But its focus is now inflation and some American investors and analysts, plus others around the world reckon that means a rise in interest rates.
Markets overnight decided to lay down and hide. The crunch has returned and when the shares of General Motors, Ford, Citigroup, General Electric and other leading stocks hit multi-year lows, you know there’s no confidence at all, anywhere.
Oil passing through $US140 a barrel (but falling to end at $US139.64) didn’t help, nor did weak European shares after a bigfinancial group announced a huge fund raising move to stave off problems and pay for an expensive takeover.
All major US indices fell 3% or more: The Dow is now at its lowest level since September 2006.
The Dow Jones index is now down 9.4% this month alone, the worst June since the 190’3. All the gains since the rescue of Bear Stearns in mid-March have been erased. It was a day when stocks seemingly capitulated to the bears.
The US dollar fell helping oil rise: corn hit a record in Chicago; sugar and wheat rose, gold jumped more than $US30 an ounce to $US915 an ounce, soybeans surged as well as more rain fell in the Midwest farm states.
A day after the Fed left interest rates steady but tried to signal its concerns about inflation, the notch was turned up a fraction on costs with the major commodity prices surging again.
Investors should realise that there’s a message from the Fed focus and that’s the danger to margins from rising inflation.
It’s a message our Reserve Bank will be looking at when it discusses interest rates at the July meeting on Tuesday. No rate rise is expected but another toughly-worded statement to remind us of a possible rate rise can be expected.
US economic growth is less than 1%, consumer price inflation is more than four times that, interest rates from the Fed more than twice that (and therefore restrictive), market rates more than four times that and mortgage rates 5 to 6 times that growth figure. And then there’s credit rationing as US banks cut back on how much they will lend and to whom.
So if anyone thinks that this will see a rise in economic activity or a rise in official interest rates over the rest of this year, they are fooling themselves. With one proviso though: if oil surges past $US140 a barrel and heads towards $US150 a barrel. It moved past $US140 a barrel briefly overnight and that sent US markets lower.
US stockmarkets, and those in Europe, Asia and Australia are now more hostage to what happens in the US than they have been for some time. Many investors want to see a recovery: that’s what the rebound from the Bear Stearns rescue in March was all about.
But with the rediscovery of inflation that has gone: shares are going lower and trading volumes in New York are low, even for summer. No one wants to go long, not with the first anniversary of the start of the credit crunch only weeks away.
So the Fed is now targeting inflation as its major concern, but the reality is the US economy will fade once the artificial stimulus from the tax rebate works its way through the system in two months time. There is just nothing ahead to replace it as a support for the US economy.
The final reading for the first quarter US economic growth showed a slight rise to an annual rate of 1% (from 0.9% in the second report and 0.6% in the first reading.) But that was due to the performance of the export sector.
Next week the European Central Bank will almost certainly either lift its key rate 0.25%, or provide such an obvious hint that the rate will rise in August that the market will factor in an increase into its pricing of the euro, the US dollar, oil, and a host of other key products.
And that will expose the Fed’s dilemma: although inflation remains the problem in the US, thanks to higher oil and food costs (not to mention steel and chemicals) the US central bank has no room to increase rates without disturbing the fragile confidence investors have in the economy and in America’s weak financial institutions.
If you had to pick just one indicator which told us something about where the US economy is headed, it’s housing prices. The Standard & Poor’s Case/Schiller house price index showed a 15% fall in the year to April, to be down 18% from the peak.
This index, plus associated figures on foreclosures and new home starts and sales, and sales of existing homes, remain the best indicator of the immediate direction for the US economy, economic growth, consumer spending and corporate earnings.
For the next six months that’s stagnation (as the IMF forecast last weekend) and for 2009, it’s a sluggish recovery and share prices which will make several attempts to forecast a rebound, only to fade away.
Some commentators found a glimmer of good news in the Case/Schiller Index in the fact that eight of the 20 cities saw a small rise in the index in the month, but that ignored the way data is collected.
The fall in US house prices is now nationwide, according to the Index.
April saw all 20 of the cities tracked post a year-on-year decline for the first time ever. Cities, such as Las Vegas and Los Angeles, as well as Miami in Florida again led the pack downwards.
The optimists saw hopeful signs in the slowing rate of dec
