SCOREBOARD: Continental drift
The monetary limbo dance continues, the Bank of England going first and ducking easily under the pole with a 100bps cut to 2 per cent. The ECB followed with 75bps 45 minutes later (to 2.75 per cent). I shouldn’t forget the 175bps cut by the Riksbank to 2 per cent. This is quite a momentous occasion for both the BoE and ECB with rates now their lowest since 1951 for the English (apparently they haven’t gone below 2 per cent since 1694) and since the inception of the euro zone for the ECB.
The clear concern for both Banks is that the combination of financial market turmoil and recessionary growth outcomes etc will lead to a marked fall in inflation. Central banks not only like to anchor inflation expectations on the way up, but also on the way down and the BoE in particular is concerned that inflation will undershoot its 2 per cent target – more cuts are expected from both. The Riksbank in contrast suggested they were going to keep rates steady for a year.
The way things are going they’ll soon be joining the Fed and BoJ in looking at alterative measures. As coincidence would have it – and with little in the way of a funds rate to move – Bernanke was out last night doing just that, suggesting in speech last night that programs to prevent mortgage foreclosure should be strengthened in order to stabilise the housing market and thus the economy. This could include things like purchasing delinquent mortgages and providing more incentive to refinance.
No love for equities out of it though - they’re not cutting for the fun of it and in any case euro zone GDP came in weak at -0.2 per cent. So European equities fell a little and at the time of writing US equities were underperforming that. Energy stocks were the big drag on the market this time, given a further $3 fall in the oil price to $43.9 and a report from a bank suggesting that oil could hit $25. At the time of writing, energy stocks were down about 6 per cent, with the broader market down about 2.3 per cent to 851.25. The Dow was off 184pts to 8406 (-2.3 per cent) with the Nasdaq -2.7 per cent. SPI futures bucked that trend rising by 0.3 per cent.
On the rates side, rumours have been flying around that the US treasury wants to target a 4.5 per cent mortgage rate for some loans. This threw things around although the curve stuck around the 173/74 mark. The bid was naturally enough put on - eventually. The 2s whipped around topping at about 0.95 per cent before easing off to 0.82 per cent down 6bps. The 5s in similar action capped at 1.68 per cent before heading south toward 1.51 per cent, down 7bps, while 10s topped 2.67 per cent and were trading at 2.55 per cent at the time of writing (off 7bps). Aussie 3s finished up unchanged at 96.52, (topped at 96.55) the 10s were looking the same but seem to have ticked up this morning 95.79 up 5bps form 1630 yesterday.
In other news there were a couple of other Fed speakers last night – Evans who suggested that the outlook for the US economy had deteriorated and that the Fed would need to think broadly about its policy options – Lockhart was a bit more upbeat suggesting that the financial system would rebound strongly and that the economy would pull out of a recession in the second half of 2009, though the near-term prognosis wasn’t good. Should also mention that factory orders in the US fell 5 per cent and jobless claims eased off to 509,000 form 529,000 (market looking for 540,000).
Nought for Australia and NZ today and the only data really worth commenting on is the payrolls number in the US tonight. 1.2 million jobs lost in the US so far and the consensus is they’ll get another 325,000 fall tonight, marking the 11th straight fall in payrolls. The unemployment rate is expected to jump to 6.8 per cent from 6.5 per cent.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
