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Market Awaits Fed MoneyNews
(Headlines - scroll down for full stories)
The week opens with the long-awaited meeting of the Federal Reserve's Open Market Committee, where the betting is that Ben Bernanke & Co. will raise interest rates another quarter of a point. A rise in rates is taken by many economists as a sign that the Federal Reserve will acknowledge that it has tightened interest rates enough to where, after some sectors of the economy have begun slowing down (like the housing market), it can now end the cycle at 15 consecutive rate hikes. "On Friday, investors pushed stocks higher after a surprisingly sharp drop in new U.S. home sales in February suggested the Federal Reserve may stop raising rates sooner than expected," Reuters said on Sunday night. "Shares of homebuilders, however, initially fell on the news before recovering later in the day."
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The tea leaves from the housing slowdown suggest that the Fed can give the economy a little breathing room. "What the leading indicators have been saying, that housing's been cooling," said Jeff Schappe, chief investment officer of BB&T Asset Management in Raleigh, North Carolina. "To the extent that it signals the economy is slowing down, the market's going to say the Fed's going to stop tightening, and that would be positive" for stocks, he added. Schappe points out that in a slowing economy, investors would do well to shed shares of some market sectors, or avoid them completely. He lists restaurants and department-store stocks at the top of the list of sectors that would be negatively impacted by an economic slide. "With the economy cooling, people may be more focused on value," he told Reuters. "It's good for Wal-Mart, whereas going out to eat or buying a high-priced article of clothing may cool down. But the equity market as a whole would benefit from the Fed taking its foot off the brake." While the market waits for the Fed to act, traders have already reconciled themselves to the Fed continuing with what it has been doing and raising rates again. According to CNNMoney, in futures contracts on the Chicago Board of Trade, investors are pricing in a 100% chance of seeing at least a quarter-percentage point rate hike at the meeting. And USA Today reports that some economists predict that the Fed won't be done raising rates for a few more months. Lehman Brothers' chief economist Ethan Harris, among others, expects three more hikes this year - to a Fed Funds rate of 5.50%. Only time will tell how stocks will react to the Fed's guidance on interest rates. The Fed will almost certainly announce a quarter-point rate hike tomorrow and will also issue a statement about the future direction of interest rates. If the Fed indicates that it will continue to raise rates past May, look out for falling stocks. If the Fed indicates that it will be more measured in terms of raising rates, look for the dollar to tumble. Editor's Note:
2. Silver Could Hit $15 by Year's End Analysts acknowledge that investors are putting more money into commodities - and many believe that a growing thirst for silver in 2006 could in fact see the metal outperform both gold and copper. This year, silver is seeing its largest rally since 1979, enjoying a 55% spike over the past year. The metal is "above $10 an ounce for the first time in 22 years, may reach $15 by year-end on rising demand from jewelry makers and commodity investors," Philip Klapwijk, executive chairman of London-based metals researcher GFMS Ltd, tells Bloomberg News. "The 30% jump in silver prices last year far exceeded the 3% rise in the Standard & Poor's 500 stock index and the 2% return on the 10-year U.S. Treasury note." And some of the world's biggest investors have taken advantage. Microsoft chairman Bill Gates "is the second-largest shareholder in Vancouver-based mining company Pan American Silver Corp. His 3.32 million shares of Pan American are valued at about C$99.6 million ($85.2 million) and have tripled since 1999, when Gates made the investment," Bloomberg reports. And while he refuses to acknowledge whether he still owns it, the Oracle of Omaha Warren Buffett did buy almost 130 million ounces of silver in 1997. If Buffett still holds it, the metal would be worth some $1.38 billion - netting him about $700 million from the time he first bought it.
The vast gains coming from silver are largely a matter of supply. But supply could well tighten, as Barclays Global is waiting for U.S. approval to initiate an exchange-traded fund linked to the price of silver. The move would generate fresh investment demand for the precious metal. Meanwhile, some claim the increased demand for silver has been completely inflated and that the need for silver is actually losing steam due to factors like the transition to digital cameras and less use of the metal within the film industry. As silver has become more widely used in industrial, medical and other uses over recent years, it has become a haven for investors insulating themselves from a falling dollar. "Demand for silver in industrial applications is estimated to have risen between 5% and 6% in 2005, GFMS said."
According to Bloomberg: "In the United States, which accounts for about 20% of global silver use, demand exceeded supply by about 2,700 tons in 2004."
3. China Growth Tailing off - by Design? Economists marveled at the rise in the Chinese economy in 2005. And why not? With a growth rate of 9.9% in 2005, investors cheered the roaring Asian tiger and its burgeoning, big-spending middle class. Now it looks like that tiger has been defanged, if only a bit, as China's economy is expected to grow 8.9% in 2006, slowing from 9.9% last year, the Federal Reserve Bank said in a research report on Monday. "Annual growth in China's gross domestic product will gradually slow from 9.2% in the first quarter of this year to 9% in the second quarter, 8.9% in the third and 8.7% in the fourth quarter," said the Fed report. Inflation seems to be relatively non-problematic. The Fed says that the consumer price index should only rise a tick or two to 2%, up from 1.8% in 2005. Even so, Fed data indicates that the Chinese government has a lot to do with the economic slowdown. Growth in 2004 was 10.1%, followed by 9.9% and the expected growth rate of 8.9% in 2004 and 2005, respectively. While most countries would kill for such rates, there's little doubt that China is pulling back. The Fed attributes some of the slowdown to expected growing pains, as government efforts to control excess investment in real estate projects and some industries (such as steel and cement) have hurt the economy. The Fed points out that the Chinese government's five-year-plan calls for slowing economic growth down to 7.5% a year after 2006 and right up to 2010.
Editor's Note:
4. Sino-Japanese Relations Reach New Low You can cut the tension between China and Japan with a knife. The two countries have been struggling to get along since China opened its doors to the outside world in the 1970s. At first, Japan was playing the conciliatory role - having committed wartime atrocities in China - by trying to reach a mutually beneficial relationship with China and dumping loads of money into the developing nation. However, tensions have escalated in recent years, with China squawking at Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni shrine, a memorial to war dead and 14 war criminals. Recent bilateral talks ended without the two countries reaching an agreement over gas exploration in the East China Sea. Now Japan's firing back with the only weapon it has - money. Japan's Chief Cabinet Secretary Shinzo Abe announced on Friday that the country is freezing new yen loans to China. Japan would "put off making a decision on yen loans for this fiscal year to China ... because of various situations surrounding Sino-Japanese relations," said Abe.
Japan has lent China $25.7 billion in low-interest loans since 1979. And it looks as if Japan is ready to cut the purse strings. In recent years, loans have fallen to $728 million in 2004 from $1.19 billion in 2000. The loans have gone to building many of the skyscrapers in China's modern coastal cities. Chinese newspaper China Daily characterized the development assistance from Japan as economic goodwill that benefits Japan perhaps more than it does China. But the paper concedes that "the economic interdependence between China and Japan is of positive value to their relationship as a whole." Stay tuned to see if Japan thaws this icy relationship with new loans to China.
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