February 14, 2011

U.K Inflation fears lead investors to bet on rate rises

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U.K Inflation fears lead investors to bet on rate rises

Published: February 13 2011 18:54 | Last updated: February 13 2011 18:54 – The Financial Times

LONDON – Hundreds of billions of dollars have exchanged hands this year in bets on when the next interest rate rises will be in the UK and eurozone, as volumes have surged in these markets because of the growing threat of inflation.

Financial markets are betting that the UK will be the first to raise rates in June, followed by the European Central Bank in September and finally the US Federal Reserve in December.

Rising food and commodity prices have prompted markets to bring forward expectations of rate rises, sparking the jump in volumes as inflation has become one of the biggest concerns for businesses, consumers and investors.

The increasing focus on inflation has also triggered a debate over the accuracy of these predictions, with opinions divided over how much faith investors should place in them.

Don Smith, economist at Icap, said: “The market forecasts are as good a guide as you will get. They are in a sense multibillion-dollar predictions because of the vast amount of money behind the trades that set them.”

Some strategists also argue that rate forecasts can be self-fulfilling, as central banks do not like to surprise markets.

However, John Wraith, fixed-income strategist at BofA Merrill Lynch, said: “Market rate expectations are useful indicators, but they only tell you the consensus market view at any given point in time. Circumstances change and so do they.”

Mr Wraith thinks rates in the UK, for example, may be delayed beyond June, as policymakers are more concerned about weak growth in spite of rising inflation, which at 3.7 per cent is nearly double the Bank of England’s inflation target. There is also a view that rises in fixed-interest mortgage rates and some company loan costs are in effect tightening monetary policy for the Bank of England, which means that rates may not have to be increased as early as the market expects.

However, most strategists say the markets are more accurate today than they were in the past, as the contracts – known as overnight index swaps in the UK and eurozone and Fed funds futures in the US – used to make the predictions are more widely traded with hundreds of banks and investment funds making bets.

Brokers say rough estimates show daily turnover has risen to about $200bn in Fed funds futures and to about $20bn in each of the UK and eurozone overnight index swap markets


January 8, 2011

VAT rise could push UK economy into double dip

VAT rise could push UK economy into double dip, says leading economist

Chancellor George Osborne, in a recent interview, has dashed any hopes of the impending VAT rate rise being revoked as soon as the economy picks back up, saying that it is a ‘structural’ change to the tax system.

The interview is reproduced in part here on The Spectator blog , Coffee House and it immediately provoked a response from the investment community.

John commenting on The Daily Mail’s site says: “Well you heard it from the horses mouth. Vat, the only tax that affects ALL students, pensioners and families will stay up, but the 50p tax that only affects the wealthiest will come down…as soon as the government coffers are fuller. Translated from Tory speak: “you all have too much money, unless you are loaded and then you don`t have enough”

Double Dip trigger?

The VAT rate rise has been controversial ever since it was announced. Back in October Simon Ward, chief economist at Henderson Global Investors warned that raising the VAT rate in January could push the UK economy into a double dip recession. We reported that here .

Only time will tell whether the government should have heeded his warning to postpone the rate rise.

Why is VAT going up?

The reasons behind the rate hike are simple. The Office of Budget Responsibility has revealed that the VAT rise due to come into force in January is intnded to reduce the UK’s gross domestic product by 0.3% in 2011-12.

As Tom Clougherty, executive Director of the Adam Smith Institute, writing in The Yorkshire Post puts it: “In plain English, that means raising VAT from 17.5% to 20% will destroy some £5 billion of economic activity in the next tax year. The reason for this is simple: raising VAT will dent consumer confidence and discourage spending; fewer goods will be sold and lower profits will be recorded.”

What the rise will mean to consumers

A report from data management firm Acxiom has found the increase will cost the average household £225 a year – soaring to £448 for more well-off families, as reported here on

DennisCooper commenting on the BMW 5 Series owners forum is sanguine about the rate hike: “The VAT increase is a measure which will help the UK slowly recover from it’s massive hangover from the crazy borrow more & spend more days.

“On a national level, that’s what the last government did, and on a banking and businesses level it was done and of course by individual consumers as well.

“Everyone in reality, who spends more than they bring in will eventually be brought back down to earth with a bump. You have to pay back what you borrow!”

Effects on business ?

For businesses, the response has been mixed. According to an Institute of Chartered Accountants in England and Wales (ICAEW) poll, businesses are split about how they will deal with the increase in VAT. It found that six out of every 10 businesses believe that the VAT hike will affect their organisation’s cash flow to some extent.

Nearly one tenth think cash flow will be affected to a significant degree, as reported to , a site for small business owners.

The British Retail Consortium has calculated that the VAT rate rise will cost 30,000 jobs next year, and a total of 163,000 jobs by the end of 2014.

David B Smith, a visiting professor at the University of Derby, has also run the VAT rise through his Beacon Economic Forecasting model, and found that the 20% rate will increase the number of people claiming unemployment benefits by 236,000 over the next 10 years.

As the Adam Smith Institute’s Clougherty, says: “That’s bad enough on its own to raise questions about the Government’s plans. Does it really make sense to be willfully damaging the private sector economy, when the recovery is still so fragile?

Surprise jobs surge boosts U.S economic outlook 2011

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Surprise jobs surge boosts U.S economic outlook 2011

(Reuters) – A surprise surge in private-sector employment last month to its highest level on record provided the most bullish signal in months that the U.S. economy is on the mend.

Private employers added 297,000 jobs in December, triple the median estimate by economists and up from the gain of 92,000 in November, an ADP Employer Services report, whose data goes back to 2000, showed on Wednesday.

The report undercut the prices of the U.S. Treasury securities, and helped the U.S. dollar gain against the yen and the euro. U.S. stocks opened lower though they did pare losses after the jobs news.

“Sometimes numbers come as bolts from the blue; this is one of them,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“Nothing in any other indicators of the state of the labor market last month — jobless claims, help wanted, surveys — suggested anything like this was remotely likely.”

ISM’s index on the services sector also came in better than analysts expected, though the index’s employment component was a touch weak. Read about ISM services index.

“The data today still leaves an impression that a U.S. upside growth surprise in 2011 needs fresh assessment,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank.

Macroeconomic Advisers Chairman Joel Prakken noted seasonal factors may have boosted the December numbers but said growth in employment was “comfortably into positive territory and seems to be accelerating.”

January 1, 2011

IMF Economist Sees Two-Speed Recovery In 2011

IMF Economist Sees Two-Speed Recovery In 2011

(RTTNews) – A two-speed economic recovery will be extended into 2011 with rich nations facing weak growth and emerging markets moving ahead with strong recovery, according to IMF’s chief economist Olivier Blanchard.

In an interview to the Fund’s online magazine, IMF survey, Blanchard noted that along with their strong rebound, emerging economies will be facing tough challenges like managing possible overheating and capital flows. At the same time, growth in advanced economies will remain low, barely enough to bring down unemployment.

“The two-speed recovery, low in advanced countries, fast in emerging market countries, is striking and its features are increasingly stark. They will probably dominate 2011, and beyond,” Blanchard said.

He also warned that countries will be risking a healthy recovery in the absence of continued focus on rebalancing their economies in the coming year, including structural measures and exchange rate adjustments.

Countries with excessive budget deficit must rely more on external demand or exports. And, by symmetry, surplus countries, many of them emerging markets, must do the reverse, shift from external demand to domestic demand and reduce their dependence on exports, the economist noted.

Regarding the economic prospects of low-income countries, he said recovery in trade and high commodity prices have bettered economic conditions in these nations. Private domestic demand also remained quite strong


November 30, 2010

South Australian businesses strongest in ‘growth, cashflow’ – survey

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South Australian businesses strongest in ‘growth, cashflow’ – survey

SOUTH Australian small-to-medium-sized enterprises had the nation’s strongest business conditions and equal-highest cash flow position in the September quarter.

The latest NAB SME quarterly survey shows business conditions in SA rose by one index point, to eight, in the three months to September 30.

Nationally, the index fell by an average of one index point.

SA and Western Australia reported the nation’s strongest cash flow position, at 11 points.

NAB state general manager nabbusiness Jacqui Colwell said the results showed SA’s small businesses continued to outperform their Australian counterparts.

“South Australian SMEs have maintained the highest, or equal highest, business conditions nationally for the past year,” she said.

“The SA economy is characterised by steady growth without the level of peaks and troughs experienced in other states.”

Ms Colwell said the September quarter results highlighted the effects of ongoing global economic uncertainty, speculation around interest rates and this year’s drawn-out federal election.

“(This) caused some business owners to defer investment plans, focus on reducing debt levels and (curb) discretionary spending,” she said.

The survey also reveals that confidence among SMEs for the December quarter has improved strongly.

The 12-month outlook was “optimistic” at 25 points.

Other key results from the survey show:

* Small businesses operating in the finance and accommodation sectors had the strongest cashflow positions, with 28 and 14 points respectively. Construction and retail were the weakest in this area.

* Cash flows and borrowing costs were the most critical issues for SMEs.

*Business services, finance and health were the strongest performing SME sectors in the September quarter.

“The period leading up to Christmas is critical for many industries, particularly the retail sector which, unlike the Australian tourism industry, can benefit from the appreciating dollar,” said Ms Colwell.

October 13, 2010

Japanese core machinery orders rise +10.1% Results Above View

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Japanese core machinery orders rise +10.1% Results Above View

Japanese core machinery orders +10.1% in August vs previous month on back of growth in manufacturing sector. Result much better than median forecast for 4.5% decline in poll of economists surveyed by Dow Jones.

“This is absolutely a surprise. The market may enjoy gains in early trade,” says Kenichi Hirano, strategist at Tachibana Securities.

Core machinery orders unexpectedly rose 10.1% in August on-month, due to growing demand from manufacturing sector. Machinery stocks higher.

Chip-related stocks higher on strong after Intel (INTC) earnings last night.

December 18, 2009

Fed To Leave Rates Low For ‘Extended Period’

Fed To Leave Rates Low For ‘Extended Period’


WASHINGTON — The Federal Reserve pledged Wednesday to hold interest rates at a record low to drive down double-digit unemployment and sustain the economic recovery.

The Fed noted that the economy is growing, however slowly. And turning more upbeat, it pointed to a slowing pace of layoffs.

Still, Fed Chairman Ben Bernanke and his colleagues gave no signal that they’re considering raising rates anytime soon. They noted that consumer spending remains sluggish, the job market weak, wage growth slight and credit tight. Companies are still wary of hiring, they said.

Against that backdrop, the Fed kept its target range for its bank lending rate at zero to 0.25 percent, where it’s stood since last December. And it repeated its pledge, first made in March, to keep rates at “exceptionally low levels” for an “extended period.”

In response, commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 percent. That’s its lowest point in decades.

Super-low interest rates are good for borrowers who can get a loan and are willing to take on more debt. But those same low rates hurt savers. They’re especially hard on people living on fixed incomes who are earning measly returns on savings accounts and certificates of deposit.

Noting the stabilized financial markets, the Fed said it expects to wind down several emergency lending programs when they are set to expire next year. That seemed to strike a confident note that the Fed thinks it can gradually lift supports it provided at the height of the financial crisis.

The central bank made no major changes to a program, set to expire in March, to help further drive down mortgage rates.

The Fed in on track to buy a total of $1.25 trillion in mortgage securities from Fannie Mae and Freddie Mac by the end of March. It has bought $845 billion so far. It’s also on pace to buy $175 billion in debt from those groups under the same deadline. So far, the Fed has bought nearly $156 billion.

Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 4.81 percent, Freddie Mac reported last week. That’s down from 5.47 percent last year.

The Fed said it has leeway to hold rates at super-low level because it expects that inflation will remain “subdued for some time.”
Fed policymakers repeated their belief that slack in the economy — meaning plants operating below capacity and the weak employment market — will keep inflation under wraps.

A government report out Wednesday showed that inflation is in check despite a burst in energy prices. Energy prices, however, are already in retreat.

Bernanke, who’s seeking a second term as Fed chief, has made clear his No. 1 task is sustaining the recovery. Last week, he and other Fed officials signaled they are in no rush to start raising rates.

At the same time, Bernanke has sought to assure skeptical lawmakers and investors that when the time is right, he’s prepared to sop up all the money. Some worry that the Fed’s cheap-money policies will stoke inflation.

Some encouraging signs for the economy have emerged lately. The economy finally returned to growth in the third quarter, after four straight losing quarters. And all signs suggest it picked up speed in the current final quarter of this year.

The nation’s unemployment rate dipped to 10 percent in November, from 10.2 percent in October. And layoffs have slowed. Employers cut just 11,000 jobs last month, the best showing since the recession started two years ago.

Still, the Fed predicts unemployment will remain high because companies won’t ramp up hiring until they feel confident the recovery will last.

Consumers did show a greater appetite to spend in October and November. But high unemployment and hard-to-get credit are likely to restrain shoppers during the rest of the holiday season and into next year.

-Financial Post-

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