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Precious Metal Prices Highest in Decades MoneyNews
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The New York Times reported today that Chief-of-Staff-to-be Joshua Bolten wants Treasury Secretary John Snow to resign. According to the article, Bolten wants "someone who can more forcefully communicate the administration's message that the economy is strong" in the office of Treasury Secretary. Snows "strong dollar" policy has been at odds with the Adminstration's desire to let the dollar fall. In fact, at times the policy looks like all talk and no action. In recent weeks, the Administration and members of Congress have pleaded with China to let the yuan rise against the dollar. In effect, allowing the dollar to plunge.
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Treasury Secretary Snow would not comment on the article.
As a result of the article, among other factors, the dollar fell to its lowest point in two months against the euro and slid against the yen as well. "Japanese exporters sold the U.S. currency after it rose on weak Japanese industrial production data," according to the AP. "Traders said the weak data initially caused U.S. and Japanese hedge funds to buy dollars for yen, pushing the greenback to an intraday high of 117.95 yen." However, the government of Japan is expected to report a rise in consumer prices - an indicator of inflation - tomorrow, increasing speculation that the Bank of Japan may raise interest rates for the first time in over a decade. "Japanese economic conditions are relatively good at this moment, and it will continue to be fairly robust," Eisuke Sakakibara, Japan's former vice minister of finance for international affairs, said in an interview with Bloomberg News. "The Bank of Japan will start to raise rates toward the end of the year." The European Central Bank just raised rates for the second time in three months to 2.5%, and another rate increase is expected in May. With Japan and Europe just beginning their interest rate adjustment cycle, and speculation that the Fed will end its series of interest rate hikes soon, the euro and the yen are looking more attractive. In other news, the United Arab Emirates central bank governor said that the country may buy more euros this year. According to Bloomberg News, about 98% of the UAE's 22.59 billion in reserves are in U.S. dollars, and the country wants to diversify their holdings. "Maybe we will come to the conclusion that the euro will appreciate over a period of nine months," Sultan bin Nasser al-Suwaidi said in an interview in Dubai yesterday, says Bloomberg. Editor's Note:
2. Precious Metal Prices Highest in Decades In the wake of Wednesday's Fed rate hike and statement, continued unrest in the Middle East and dollar weakness, precious metals saw their largest gains in decades. Trading at $581 an ounce on the NYMEX, gold enjoyed its highest price in a quarter-century. "Silver for May delivery rose to $11.52 an ounce, its highest level in 22 years, and was last trading up 31 cents at $11.43 an ounce," MarketWatch reports. "Copper added 1.05 cents to $2.449 a pound, having earlier traded at a record $2.459 a pound. Platinum rose $8.10 to $1,085 and palladium was up $10.60 at $348 an ounce." The news service cites economists from Action Economics as saying that "the strong gains in base metals of the past several sessions had sparked a surge in demand from fund managers looking for asset classes offering higher returns." And excitement over a soon-to-be-launched silver ETF from Barclays has seen that metal shoot higher. The demand for precious metals is clearly multiplying as investors look for a safe haven to guard against a falling dollar and stock market uncertainty. Editor's Note:
3. 4Q Economy Slowest In 3 Years The Commerce Department revised fourth quarter 2005 GDP up a fraction to 1.7%, but it was the slowest growth in three years. The upgrade reflected stronger inventory building by businesses, says the AP. The revised GDP also showed lower consumer spending on services. Sales fell 0.2% in the quarter. Consumer spending declined on motor vehicles and federal defense. Imports also accelerated, resulting in slower domestic growth. Those are both bad signs for the health of the economy. If businesses produce more goods and consumer spending goes down, there could be a glut of goods on the shelves. In other words, are inventories rising because consumers have stopped buying? The wild card in the economy's health is consumer spending, which accounts for 2/3rds of the economy. If consumers were to snap shut their wallets, the nation's GDP would go into a tailspin. Another warning signal: Higher inflation. Core consumer inflation increased at a 2.4% annual pace in the quarter, up from 2.1% a month ago, according to MarketWatch. The Fed has an implicit inflation target of 2% for the core personal consumption expenditures (PCE) index. A PCE above 2% for a sustained period could be a signal for more rate increases by the Fed. Economists, including the Fed who cited "temporary or special factors," blame the after-effects of Hurricanes Katrina, Rita, and Wilma as a drag on the economy. However, the hurricanes were a bigger drag on GDP in the third quarter, and the economy still managed to post 4.1% growth. One huge bright spot for GDP: Corporate profits. Profits hit a record of $1.479 trillion in the fourth quarter - up 14% from the third quarter. Most economists expect that first quarter 2006 GDP is expanding at almost a 5% pace, and that growth will moderate for the rest of the year. If that happens, it will show the nation's ability to rebound after a weak quarter, and dispel fears of a recession. If it doesn't, and consumer spending craters, the stock market is in for a rude awakening. Editor's Note:
4. Have Chinese Banks Changed Their Ways? The solvency of Chinese banks has long been a question of foreign investors. They wonder, "Just how healthy is China's economy if the nation's biggest banks are unstable?" Sure, year after year they report strong earnings. In January, AFX News told us: "China's biggest lender, the Industrial and Commercial Bank of China (ICBC), said last week that its unaudited operating profit rose to 90.2 billion yuan in 2005, up 15.5 billion yuan from 2004. "In the same week, China's Industrial Bank saw its net profit for last year rise 43.16 pct to 2.4 billion yuan on surging retail sales, while Shanghai Pudong Development Bank exceeded market expectations by reporting 2005 net profit of 2.49 billion yuan, up 28.76 year-on-year. "Even the Agricultural Bank of China (ABC), one of the larger but weaker banks, saw a 10 billion yuan rise in operating profits to 42.4 billion yuan in 2005." But the International Monetary Fund is unsure. A new research report by the IMF says that China's biggest state-run banks are not following standard lending practices reports The Financial Times.
The banks covered in the report are the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BoC) and the Agricultural Bank of China (ABC). The banks account for about 60% of all lending, according to FT. The Chinese government has granted hundreds of billions of dollars to restructure and recapitalize the banks and foreign investors, including Bank of America and Royal Bank of Scotland, have bought up stakes in the banks, still there is not much change to their lending practices. "Fundamental changes of behavior of state-owned banks will inevitably take time, even after major high-level reforms are successfully implemented," says Richard Podpiera, the author of the study, to FT. The IMF paper says that, despite changes to the corporate governance rules, the changes have had little impact on the "way business is done" in China. The banks, claims the IMF report, do not take into consideration the profitability of the borrowers, only relying on savings deposits of the borrowers. The paper also questions the banks reporting of non-performing loans in recent years. Despite no change in lending practices, "only 2% of loans made since 2000 have gone sour, compared with 45% for the period before 2000," says FT. Mr. Podpiera writes, "There is a striking difference between the reported credit quality of old and new loans, suggesting either a dramatic improvement of the underlying credit quality since 2000 or measurement problems." Perhaps the stark difference is a slower pace of lending in recent years, posits the IMF. Or, it could also be that banks are not reporting their non-performing loans because of the increased scrutiny on their health.
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