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Farrell: First Australia, Now India, And Hong Kong

Australia raised interest rates a few weeks ago and now India is taking steps to reign in the liquidity infusions of the past year. The Reserve Bank of India told lenders they have to keep more cash in government bonds thereby reducing potential loan volume. An official was quoted as saying "It may be appropriate to sequence the exit in a calibrated way". Official forecasts call for 6% GDP growth but private estimates are above that. Economist Mridul Saggar says "We will start to see G20 economies exiting now starting with the emerging ones and then the advanced countries".

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Hong Kong's Monetary Authority announced a desire to slow the surge in luxury property prices.

They will probably limit the amount of mortgage money that can be used to buy expensive homes.

It's a small step, but a first one. South Korea just reported its third quarter GDP rose a robust 2.9% versus the second quarter.

That is the best showing since the first quarter in 2002. Most expect Korea to bump rates up and to start its exit program to get in front of any potential inflation. There has also been chatter about resource based Norway raising rates as well.

There was an article in the Financial Times of London last week that said the Federal Reserve in the US should become more hawkish in its tone regarding interest rates. It won't happen if you read a variety of comments from Federal Reserve Governors. Recently, Janet Yellen, President of the San Francisco Fed, said there would "certainly" not be an interest rate rise soon. Chicago Fed President, Charles Evans, warned any recovery "is going to be very unsatisfactory in 2010 with weak labor markets and plenty of idle factory capacity...there is sufficient slack in the economy to set aside inflation fears". He went on to say he worries more about inflation rates falling too low. The Boston Fed chief, Eric Rosengren (there are a lot of these guys!), noted his view that much of the US is in "the early stages of recovery". But if the Fed wanted to signal anything it would be via the language of its statement on November 4 when they next issue Fed type edicts. Look to see if the word "accommodative" regarding interest rate policy is still included. Or the phrase "extended period" might be tinkered with. Since there has been some movement in the world towards exiting loose monetary policy the Fed statement will be subject to even closer scrutiny than usual.

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The Case Shiller housing report contained good news Tuesday.

The index for the 20 cities surveyed fell 11.3% from a year ago (which is the best showing since early 2008), but rose 1% versus last month. The three month over prior three month annualized gain is 6.7%. Nineteen of the twenty cities reported sequential gains and while we are still 29% below the peak reached in July, 2006, three months in a row of monthly gains starts to look like a trend. With the $8000 tax credit for new home buyers in place, we could be drawing future purchases forward. It is probably also true the pipeline is full of foreclosures that have yet to hit the market, and unemployment is high. But historically low mortgage rates and improved valuations might be enough to counter those other negatives. My best guess is there will be a slump in the rate of improvement if the tax credit were allowed to expire.

  • Mortgage Applications Slump for 3rd Straight Week

Consumer confidence as measured by the Conference Board unexpectedly fell to 47.7 from 53.4. The "expectations index" also slumped to 65.7 from 73.7. Confidence surveys correlate very well to the stock market movement and the trend in gas prices so we should have had a favorable number. Unemployment and stagnant wages probably are weighing on the consumer psyche. We are well off February's extreme low of 25.3, but we are still below the reading of 61.4 that was registered just before Lehman collapsed. Not to make you feel bad, but the long term average for this measurement is about 95. Ouch!

Mike Ward of Soleil/Ward Transportation reports the labor contract voting is tilting away from Ford as of the other night. Work rules that Ford favors might not make it through a vote of the rank and file. The final tally will be known this Saturday and Ford is expected, says Mike, to report earnings next week. It is hoped the North American operations will come close to breakeven. Mike rates Ford a Buy and has a price target of $10. Please contact Soleil for a copy of the report.

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