Fed Lowers 50 Basis Points

123jump.com Staff
18 Sep, 2007
New York City

The Fed lowered its target for fed fund rates by 50 bais points to 5.75%. The Fed, bowing to the pressure from investors and Wall Street, lowered the rate to maintain orderly conduct of the credit markets. The Fed statement cited that the readings on core inflation have improved but it promised to monitor inflation closely. The Fed appears to be concerned tha fallout from the malaise in the financial markets may affect broader economy. Dollar may be take brunt of the Fed action.

[R]2:15AM New York – The Federal Reserve lower the rate by 50 basis points to 4.75%.[/R]

The Federal Reserve Bank bowing to the pressure from the Wall Street dropped interest rate down by 50 basis points to 4.75%. The fed funds have stayed at 5.25% since June 2006. The first rate cut in four years was designed to prevent widening financial market turmoil to broader economy.

Wall Street for days had been clamoring for a rate cut and in the last two weeks had anticipated rate cut of 50 basis points. Market analysts had projected that 25 basis points will not be enough to maintain economic stability and prevent ongoing housing market correction to slow the economic growth. The Fed also lowered the discount rate by a half percentage point to 5.25%.

The Fed’s aggressive action is viewed by market as a preemptive move to sustain economic growth and stability. Stocks rallied on the news.

The Fed statement noted that “economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

The Fed is worried that the fallout from the financial markets turmoil may broaden to domestic economy and damage the health of global economy. Libor rate, the rate charged by banks to each other for borrowing, has increased in the last two months to 5.59%. The Fed has been monitoring the rate rise and has been worried that the rate rise in Libor will affect most borrowers. Most consumer and business loans are tied to the Libor interest rate.

Market rejoiced in the Fed’s move and the Dow Jones index quickly shot up more than 200 points after the rate cut. Investors have been asking the Fed to lower rates before the economy slowed and did not want the Fed to wait for more confirmation in the economic data. The latest monthly jobs report showed first decline in jobs in August and retail sales and industrial production have been reported at below estimates of the most economists. The Fed in apparent attempt to keep economy chugging may have harmed dollar for months to come. While stock markets are trading higher on the news today, the reality may sink in the days to come. Lower rates are not likely to correct housing market excesses of the last five years. If anything, lower rates will only encourage more reckless lending. The value of dollar may be sacrificed to keep economy growing at all costs.

The lower interest rates will drag dollar lower against euro and yen in the days to come. While lower dollar will help manufacturing export but will fuel inflation as prices of imported goods rise.

Today’s rate cut may haunt the Fed in months to come if inflation rears its ugly head. Several economists have suggested that the Fed should not bow to the pressure from the Wall Street and those who took excessive risk in credit market should not look to central bank for a possible bailout. The current move by the Fed may be seen as bailout in international currency market that stock and bond investors have been hoping for months.

[R]1:00PM New York, 6:00PM London - The UK stocks leapt as bank's shares rebound. UK leading mortgage lenders shares led the gainers. The inflation in UK beat the forecasts.[/R]

London stocks reversed earlier losses climbing 1.63% or 100.5 to 6,283.3 as confidence starts crippling in following government announcement that it will take full responsibility of deposits in the banks. It was red arrows on London stocks as stocks fell spurred by panic withdraws by Northern Rock depositors. Savings worth 2.2 billion pounds had been withdrawn by the close of Monday. Of the 102, FTSE 86 stocks gained, 12 declined and 4 were unchanged.

In London trading FTSE 100 surged 1.63% or 100.5 to 6,283.3 spurred by gains recorded by the banks. Banks gained after the announcement by UK government that it will take full responsibility of deposits.

The Office of the National Statistics reported that consumer price index increased 1.8% in August from a year ago compared to 1.9 % in July. Economists had projected the rate to remain unchanged.

Inflation has slowed from a decade-high of 3.1 % in March. Prices rose 0.4 percent compared to July. The Bank of England had projected that the August inflation rate may come in at below the target rate. The new inflation rate may cause the BoE to lower its interest rate forecast.

Exchequer Chancellor Alistair Darling revealed Tuesday that the forthcoming IMF meeting would among other issues focus on global financial regulations to enhance transparency in the global financial markets. Earlier yesterday, Darling had held talks with the U.S. Treasury secretary over the current turbulence in the world financial markets. Darling said their talks were centered on devising new measures for regulating international markets.

Paulson, however noted the need to review the global market laws but highlighted the necessity for a carefully approach as stiff regulations could turn out to be disastrous. Chancellor Darling also pointed out that the ongoing upheavals in the world financial market arising from the U.S subprime mortgage market problems was affecting the entire world.

Of the FTSE 100 index heavy looser tops the gainers. The troubled Northern Rock gained 8.22%, Liberty plc rose 5.06% Barclays plc gained 4.48%, while Antofagasta put up 4.46%.

Standard Charted, Royal Scotland, Land Securities, Barratt Development, Lloyds TSB all recovered from Monday losses with their stocks surging 4.15%, 3.44%, 2.79%, 1.56% and 1.27% respectively.

Of the FTSE 100 index stocks, Lonmin shed 3.62%, Marks and Spencer closed weaker at 0.70% Mitchells slid 0.68%, Persimmon declined 0.53%, while Sage eased 0.50%.

[R]11:00AM New York – 11:00PM Sydney - Australian stocks fell again on the back of renewed concerns over the subprime mortgage crisis and its effects on credit market. The Aussie dollar continued to slide. Australia lowers estimate for barley, wheat and canola crops harvest.[/R]

In Sydney trading ASX 200 Index fell 1.26% or 78.9 to 6,192.50. Australian stocks fell, as the subprime mortgage crisis was revived by withdrawals from British Bank Northern Rock Plc.

Newcrest Mining Ltd. jumped after gold prices rose to a 16- month high on speculation the credit crisis will spur central banks to reduce interest rates and boost demand for precious metals as an alternative investment to currencies. There were concerns that the cost of credit will keep rising. Interest rate for overnight loans in pounds that banks charge to each other, known as Libor, has been rising since June month, which prompted UK mortgage lender, Northern Rock to seek emergency funding to finance its customer's withdrawals of their savings.

The Australian dollar dropped 1% to A$0.8311 against the American dollar from A$0.8393 in yesterday’s trading. The fall, the most this month, was prompted by withdrawals from British mortgage lender Northern Rock Plc caused global stocks to slump, spurring traders to sell higher-yielding currencies.

The local dollars rated as the worst performers among the 16 most-actively traded currencies as investors reduced carry trades in which they bought the nations' securities after borrowing in Japanese yen.

Australian companies and consumers may face higher borrowing costs according to comments of the governor of the Reserve Bank of Australia. Reserve Bank of Australia policy makers were expected to craft a solution and indicate how they would react given that the domestic economy is showing few signs of slowing, while the world economic growth was likely to be weaker than they expected.

Australia also forecast a cut for barley, wheat and canola crops to 31 percent on dry weather, adding pressure to shrinking world supplies that have driven up prices.

Total grain harvest is estimated to be lower by 31%. According to the Australian Bureau of Agricultural Resources and Economics, October harvesting season is expected to yield 25.6 million metric tons compared to the June estimate of 37 million tons and last year's drought-ravaged crop of 15.7 million tons.

Wheat futures jumped sharply to near record level as demand exceed supply and inventories head for a 26- year low.

Barley production was expected to come to 5.9 million tons, down from the June forecast of 9 million while Canola output may be 1.1 million tons, down from a 1.4 million tons estimate. Australia is the world's third-largest canola exporter after Canada and Ukraine.

Of the ASX 200 index shares, Sino Gold Mining led the stocks with a gain of 7.20% followed by increases in AWB Ltd of 5.28%, in Newcrest mining of 4.53%, in Paladin Resource of 2.4%, and Iress Market Technology of 2.33%.

Of the ASX 200 index stocks, Commander Communications declined with a fall of 5.56% followed by losses in Compass Resource of 5.57%, in MFS Ltd of 5.58%, in Bradken of 5.74%, and in Adelaide Bank Ltd of 6.99%.


[R]9:00AM New York – Stock index futures indicate higher opening after Lehman reported only 3% drop in earnings.[/R]

Investors were relieved after the Lehman Brothers earnings report. Worried investors feared that deepening mortgage market crisis could hurt earnings at brokerage companies and were ready for a sharp drop in earnings. Just a day ago E*Trade had cautioned the market that earnings may decline as much as 31%.

Lehman Brothers ((LEH)) reported third quarter earnings of $1.54 per share beating the estimate of $1.47 on rising fees from equity offering business. The earnings of $887 million in the quarter were 3% lower than $916 million a year ago.

Revenue from bond markets trading fell 47% to $1.06 billion but in the investment banking increased 48% to $1.07 billion. International revenue was 53% of total revenue. Asset management and brokerage fees increased 33% to $802 million. The diversified revenue across various banking services and in different geographic regions helped Lehman in mitigating losses from the mortgage market meltdown.

Best Buy ((BBY)) earnings jumped 8.7% on 15% rise in revenue. The stock jumped 5% in the pre-market trading.

Indexes in Europe and New York rallied after the earnings from Lehman Brothers. Nervous investors put asides worries that the brokerage companies may report sharply lower earnings.

On the economic front, August producer price index fell 1.4% followed by 0.6% rise in July. The core index of prices, excluding energy and food, rose 0.2% after adding o.1% in July.


[R]8:00AM New York, 8:00PM Hong Kong – Asian stocks fell on rising oil price and declining banks.[/R]

Asian markets fell dragged lower by financial and real estate stocks. Japan led the region with a loss of 2% followed by declines of 1.8% in Korea, 1.5% in Taiwan, and 1.2% in Australia. India bucked the trend and jumped 1.1% and the led the region’s gainers. Singapore edged a fraction higher.

In Hong Kong trading energy stocks closed higher on record oil price. PetroChina gained 0.9% and Cnooc added 3.3%. Ahead of rate decision in the U.S. property stocks in Hong Kong fell. Wharf Holdings Ltd led the sector with a loss of 4% followed by 3% decline in Henderson Land, and 2.5% loss in Hang Lung properties.

In Shanghai trading banks led the decliners. China Merchants Bank fell 2% and ICBC edged 0.21% lower. Separately Bloomberg News is reporting that the bank has raised Rmb58 billion or $7.8 billion on the sale of 9 billion shares at Rmb6.45, top end of its offer price. The second largest bank is offering stocks in Shanghai to take advantage of investors’ appetite. The bank offering was oversubscribed by forty times.

In Sydney trading National Australian Bank led the decliners with a loss of 3%. Australian Bureau of Agricultural and Resource Economics lowered its production target for the upcoming harvesting season for wheat, canola, and barely by 31% to 25.6 million tons from June estimate of 37 million tons. Wheat production target was lowered to 15.5 million tons.

The Reserve Bank of Australia governor suggested that the local interest rate environment may toughen for borrowers. The comments put bond market on the edge and Australian dollar fell. Australian dollar dropped to U.S. 83.20 cents and 10-year bond yields on the bonds fell to 5.93%

[R]6:00AM New York, 7:00PM Tokyo - Financial stocks led the decline in Tokyo. Demand for services and retail sales fell in July as typhoons and declining disposable incomes take their toll. Yen firms as investors reduced holdings on high-yielding assets funded by loans from Japan.[/R]

Japanese stocks traded in the red, dragged down by financial stocks on resurgent fears that the credit market turmoil will affect global financial markets. The drop in demand for retail services and sales for July also dampened market sentiment. Of the 225 Nikkei stocks, 14 gained, 197 declined while 14 traded unchanged. Of the index stocks, 63 shed more than 2%.

In Tokyo trading the benchmark Nikkei 225 plunged 2.2% or 325.62 to 15,801.80. Financial stocks led the decline coupled by waning investor sentiment after The Ministry of Trade announced that demand for retail services had slipped for the month of July on bad weather and falling disposable incomes. Statistics from the trade ministry showed the tertiary index, which measures the amount households and businesses spend on services slumped 0.5% from June.

Notwithstanding the 9-year low jobless rate, falling disposable incomes caused by wages that have been falling every month this year, and slipped the most in 3 years in July, took their toll on sales. Retail sales for the month of July plunged 2.2%. Household spending fell for the first time this year. Consumer confidence and consumer spending fell to a 2-year low as the Topix index declined 3.9% in July. Since then the index has plummeted by 10% and sentiment is bearish over the outlook period.

Investors also turned to Japanese government bonds on strengthening yen and expectations that the Bank of Japan will keep a hold on the interest rates. The yield on the benchmark 10-year bond was down around half a basis point at about 1.540%. Fears that the turmoil on the credit markets will persist led the yen higher against the major currencies. The yen firmed 0.7% against the New Zealand dollar to 80.82 and against the pound by 0.4% for the third day to 228.63. Against the euro and the dollar, the yen also rose to 159.31 and 114.96 respectively.

Of the Nikkei 225 index shares, financials led the downtrend as investor’s confidence in banks fell, prompted by a run on deposits at UK mortgage lender Northern Rock and warning by the Bank of America. Mizuho Financial, Japan’s second biggest lender slipped 7.61% followed by Mitsubishi UFG edging down 7.34%. Commercial bank Resona Holdings also slipped by 6.47%. Ferokawa Electrical and Mitsui Trust Holdings anchored the five decliners at 6.39% and 6.36 respectively.

Canon led the advancers in the index, climbing 2.17%. Mitsumi Electrical edged up 40 or 2.06%. Sumitomo Chemicals and Shionogi soared 1.94% and 0.84% in that order. Matsushita Electric Work, fifth largest gainer in the index with a rise of 0.68%.

Inpex failed to buck the downtrend despite the record increase of oil to more than $80 per barrel, 24-year record. The oil company shed 0.88% at the close of trade.

Gold also touched a 16-month high at $728.90 per ounce on the New York Merchantile Exchange.

Japanese consumer lender Credia, in which JCB has 21% stake, filed for bankruptcy after is faced difficulty in raising capital and repaying debt amounting to 56.5 billion yen.