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1. Fed's Pianalto: ‘Additional Restraint' May Be Necessary
2. Toll Brothers CEO: No End in Sight for Housing Slump
3. Global Energy Shortage Coming?
4. $1 Trillion Savings Account — A Problem?
1. Fed's Pianalto: ‘Additional Restraint' May Be Necessary
Cleveland Federal Reserve Bank President Sandra Pianalto says the economy can
ride out the slumping housing market, but the Fed may have to hike interest
rates if inflation doesn't subside.
"I expect the economy to weather the recent challenges in the housing market,"
Pianalto said at an event sponsored by the Pittsburgh Business Times. "I fully
expect the economy to grow at a moderate, but sustainable pace."
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"I do not expect conditions in the housing market to spill over into the broader
economy in a meaningful way," Pianalto added. "We seem to have two economies at
work — the housing economy, which is experiencing a very large adjustment, and
the ‘everything else' economy, which is performing fairly well."
Pianalto's remarks echoed those of Chicago Fed President Michael Moskow who said
yesterday, "Currently, we do not see the slowing in housing markets spilling
over into a more prolonged period of weakness in the U.S. economy overall. On
balance, the 95 percent of the economy outside of housing remains on good
footing."
Pianalto is a voting member of the Federal Open Market Committee (FOMC), the
body that sets rates at the Fed. The FOMC voted to keep interest rates unchanged
for the third time in October after raising rates 17 times in the past two
years. The Fed will meet again in December, when Pianalto will cast her final
vote. The Fed's goal is to contain inflation while allowing the economy to grow.
"Holding the rate steady is giving us time to assess the full impact of our 17
rate increases and to see how economic conditions unfold over the near term,"
said Pianalto.
Rate increases generally take up to six months to fully work their way into the
economy to suppress inflation.
"I expect some slowing in the rate of inflation as recent energy price changes
and the effects of monetary policy actions work through the economy," she
continued.
Crude oil prices, which had been stoking inflation, have fallen from a high of
$78 a barrel in July to under $60 a barrel today. High energy prices have a
ripple effect in the economy because they increase the cost of producing
products and because petroleum is an ingredient in a slew of products.
"But some risks remain that inflation will not recede into a range consistent
with the FOMC's price stability objective. In that event, it is possible that
some additional monetary policy restraint would be required," she said.
Core inflation has been consistently above the Fed's comfort range of 1 percent
to 2 percent. Core CPI is running at an annualized pace of 2.7 percent based on
the past three months. The Core CPE deflator, another benchmark the Fed uses to
gauge inflation, was at 2.4 percent in September.
Editor's Note:
2. Toll Brothers CEO: No End in Sight for Housing Slump
Amidst chatter that the nation's housing slump is stabilizing, one homebuilder
says there's no end in sight.
"We continue to look for signs that a [housing] recovery is imminent but can't
yet say that one is in sight," said Chief Executive Robert Toll in a statement.
Toll Brothers announced a 57 percent slide in contracts for new homes in its
fiscal fourth quarter compared to last year. Home orders fell to 1,035 as of
Oct. 31 from 2,427 in the prior year, said the company.
Toll reported that revenues fell 10 percent in the quarter. Toll's backlog of
homes awaiting construction tumbled 25 percent as 37 percent of orders were
canceled. The company also lowered its 2006 estimate for home deliveries to
6,300 to 7,300 from 7,000 to 8,000.
Toll lamented, "Weak buyer confidence is keeping many customers on the
sidelines." As home prices fall, buyers tend to wait for prices to stabilize or
back away from deals already made.
"Order declines worsened significantly, despite the easier comparison [to the
year-ago quarter], increased community growth, and a likely greater willingness
to adjust prices as management has seen that the slowdown has stamina," wrote
Banc of America Securities analyst Daniel Oppenheim in a research note Tuesday.
"We expect the cancellation rate to remain elevated while home prices decline
and the time [needed] to sell a home lengthens," he added.
The company says it will take additional write-downs of between $50 million and
$100 million on land it owns and options.
The company will release full results on Dec. 5.
Editor's Note:
3. Global Energy Shortage Coming?
Governments should invest trillions of dollars to head off a potential global
energy shortage amid an anticipated 53 percent rise in fuel needs over the next
quarter century, the International Energy Agency said Tuesday.
The agency forecast that daily demand for oil alone will rise 38 percent by 2030
as energy demand climbs, particularly in emerging economies such as India and
China. The IEA also said China is expected to overtake the United States as the
world's biggest emitter of carbon dioxide before 2010.
"On current trends, we are on course for a dirty, expensive, and unsustainable
energy future," IEA Executive Director Claude Mandil said at the launch of the
Paris-based agency's 2006 World Energy Outlook in London. "In response, urgent
government action is required. The key word is urgent."
The IEA said governments will need to spend a combined $20 trillion on power,
oil, and gas production and related facilities as global energy needs are
forecast to increase 53 percent by 2030.
More than 70 percent of that increasing demand will come from developing
countries, led by China and India, the IEA said.
The report predicts that world oil demand alone will reach 116 million barrels
per day in 2030, up from 84 million barrels in 2005. At the same time, global
carbon dioxide emissions are anticipated to increase 55 percent over today's
level.
"These trends would accentuate consuming countries' vulnerability to a severe
supply disruption and resulting price shock," the report said. "They would also
amplify the magnitude of global climate change."
Mandil said governments must promote both energy investment and energy
efficiency.
He said if countries implement more environment-friendly policies, energy demand
and carbon-dioxide emissions would be significantly lower, with overall global
energy demand expanding 10 percent less than the business-as-usual scenario.
Mandil said new policies to conserve energy would also make economic sense.
"The additional upfront costs are outweighed by savings later on," he said.
The IEA, established during the oil crisis of 1973-1974, is an energy policy
adviser for its 26 member countries, including the United States, Canada,
Australia, and 19 European nations including Germany and Britain.
It coordinates measures in times of oil supply emergencies and makes policy
recommendations on issues such as climate change, market reform, and energy
technology.
The agency revised its forecast for oil prices upward on the expectation that
crude oil and refined product markets remain tight.
"Market fundamentals point to a modest easing of prices as new capacity comes on
stream and demand growth slows," the report said. "But new geopolitical tensions
or, worse, a major supply disruption could drive prices even higher."
The IEA said it expects the average crude import price to fall back to $47 a
barrel in real terms in the early part of the next decade, but then rise
steadily through 2030.
Crude oil is currently trading around $60 a barrel — it hit a summertime high
above $78 a barrel.
The IEA also said that consumers can conserve energy on a global scale by paying
slightly more for more goods, including cars and refrigerators, that are more
fuel efficient. It said additional spending of just $1 on more fuel-efficient
goods equated to $2.20 saved on the supply side, reducing the need for power
plants and networks.
However, Mandil said even the measures advocated by the agency were not enough
to ensure long-term energy sustainability beyond 2030.
"For a totally sustainable energy system, technology breakthroughs will also be
needed," he said.
"Those would include second-generation measures, such as biofuels and advanced
nuclear," he added.
Mandil said that nuclear policies would only happen if governments played a
stronger role in facilitating private investment. He said that the IEA was not
advocating government subsidies for nuclear investment, but said they should
provide a regulatory framework that is "conducive to investment."
The report said that biofuels could make a significant contribution to meeting
future road transport energy needs, helping to promote energy diversity and
reduce emissions.
© 2006 Associated Press.
Editor's Note:
4. $1 Trillion Savings Account — A Problem?
Short of an abrupt transformation of its economic model, China's problem of what
do with $1 trillion in foreign currency can only get a whole lot bigger.
To the country's foes, Monday's disclosure on state television that China has
become the first country to amass $1 trillion in reserves is a symbol of an
alarmingly rapid rise.
To social planners, and to economic nationalists who resent investing the money
mainly in U.S. assets, the reserves are a piggybank to be raided to pay for
schools, clinics, and pensions.
But to economists, the growing stash is first and foremost a reflection of
deep-seated domestic imbalances, notably an excess of savings that is generating
an ever-growing trade surplus.
So without radical steps to correct those imbalances, such as letting the yuan
rise sharply, boosting consumption and letting capital flood out of China, the
reserves can only keep growing.
"The pace of expansion in China's reserves will not slow for the next three to
five years. It will continue to experience a trade surplus over the medium to
long term," said Zhong Wei, director of the Finance Study Centre at Beijing
Normal University.
Indeed, the International Monetary Fund said last week that, in the absence of a
shift in the exchange rate and assuming current policy settings, the pace of
reserve accumulation was likely to quicken.
The stockpile, which stood at $219 billion as recently as 2001, would grow to $2
trillion by the end of 2010.
The reserves are a problem because, in buying them, the central bank floods the
banking system with yuan, providing the financing for unwanted investment growth
and preventing the bank from setting interest rates at a level that suits the
economy.
"Persistent and rapid FX reserve accumulation and the attendant liquidity
injection will continue to pose a major challenge to effective monetary control
in China," said Qing Wang and Steve Chih-Hsiang Wang at Bank of America in Hong
Kong.
Gradualism
To slow the buildup of reserves in future, economists expect a continuing
gradual rise in the yuan and more steps to increase the cost for exporters of
doing business in China similar to the recent reduction of a swathe of export
tax rebates.
But the social, cultural, and demographic drivers of China's giddy savings rate
of 50 percent of GDP are harder to influence, even if, as Nicholas Lardy of the
Institute for International Economics in Washington has noted, the introduction
of national health insurance in Taiwan boosted average household spending there
by more than 4 percent.
"Given that the national savings rate is likely to be higher than the investment
rate, large current account surpluses and rapid accumulation of foreign exchange
reserves will probably continue in the perceivable future," Yiping Huang and
Minggao Shen, economists with Citigroup, said in a report.
If the flow of new reserves are going to be hard to staunch, what about doing
something with the existing stockpile?
After all, in a country where more than 135 million people scrape by on under $1
a day, a stash of $1 trillion is jarring.
In theory, China could hand out about $770 for every man, woman and child; it
could buy up every company listed on China's stock exchanges and still have $185
billion left for a rainy day.
But economists say it's not as simple as that.
For a start, the reserves are assets on the balance sheet of the central bank,
matched by liabilities in the form of yuan.
So, as deputy central bank governor Wu Xiaoling has forcefully stated, somebody
would have to pay for the reserves.
Not So Fast
One idea is for the ministry of finance to do so by issuing bonds to the
central bank.
But, as Bank of America points out, spending any proceeds domestically, say on
teachers' salaries or cheap medicines, would not lead directly to either more
imports or capital outflows, and so would not help slow reserve accumulation.
Stockpiling natural resources would whittle down the reserves but not by much.
China's new strategic oil storage tanks will eventually hold 500 million
barrels, but filling them would still cost "only" $30 billion. Similarly, a
year's imports of iron ore, soybeans, copper, alumina and nickel costs "only"
$40 billion.
Another increasingly popular idea, raised again in Tuesday's press by prominent
economist He Fan, is for China to set up an investment agency, like the
Government Investment Corp. of Singapore, to diversify part of the reserves into
higher-yielding assets.
Yet this suggestion, too, goes to the heart of what liquid reserves are for. If
the central bank ever did face a run on the yuan, it could hardly stem the
haemorrhage with barrels of oil.
Moreover, noted Jonathan Anderson with UBS in Hong Kong, the question is
intensely political. Does the money belong to the central bank, to the ministry
of finance or to another agency?
"To date, we have not had a single case in Asia of a central bank writing down a
substantial portion of its international reserves to enable alternative asset
investments, not to mention a case where the central bank was persuaded to cede
control over investment funds to government ministries.
"And we don't expect China to be the first," Anderson wrote.
© 2006 Reuters.
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