Headlines (Scroll down for complete stories):
1. Fed Leaves Rates Unchanged: What's Next?
2. Rogers: Sell U.S. Dollar, Buy Real and Yuan
3. Retail Sales Surge in November
4. CEOs: Slower Economic Growth Ahead
1. Fed Leaves Rates Unchanged: What's Next?
The Federal Reserve yesterday decided to leave interest rates unchanged for the
fourth consecutive time, but what's next for interest rates?
The majority of analysts are forecasting a rate cut to happen sometime next year
with estimates generally pointing to the first quarter. Their argument is that
the slowing economy, led by the housing slump, will force the Fed to inject life
into the economy.
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Other analysts say the Fed might just have to raise interest rates next year. At
2.4 percent, inflation is still above its comfort level of 1 percent to 2
percent. In fact, the Fed's Jeffrey Lacker voted for a 25 basis point interest
rate hike at yesterday's meeting, whereas no Fed officials voted for a cut.
But The Associated Press is reporting that there is another school of thought
brewing: The Fed will pause for the entire year.
These economists say the Fed's 17 consecutive rate hikes, which ended about six
months ago, are now working their way into the economy and slowing inflation.
The Fed's goal is to maintain growth while minimizing inflation. These
economists argue that a rate hike at this point might lead to recession while a
rate cut might cause a spike in inflation.
The economists point to the Fed's official statement yesterday. The Fed elevated
its concern of the housing market slump, saying there is "a substantial cooling
of the housing market." At its last meeting in October, the Fed did not use the
word "substantial."
That addition could give the Fed hawks — those who are looking for a rate
increase — a boost. But the AP points out, "the changes the Fed made in its
statement were so minor that it left private economists with the distinct
impression that the central bank feels no need to make any changes in its
current stay-the-course policy."
"The fact that there was very little change in the Fed's policy statement is a
metaphor for no change in monetary policy any time in the future," Mark Zandi,
chief economist at Moody's Economy.com, tells the AP.
Zandi notes that the Fed didn't change its inflation phrasing. "If they had
really wanted to change expectations about a Fed easing they would have changed
the language they used on inflation, and they didn't," he said.
Instead, the Fed repeated its warning that inflation is still a concern. "The
Fed judges some inflation risks remain," the Fed statement says.
"The message here is that the Fed is going to keep policy unchanged for an
extended period of time," adds David Jones, chief economist at DMJ Advisors.
"Fed officials feel the economy is headed for a soft landing."
Editor's Note:
2. Rogers: Sell U.S. Dollar, Buy Real and Yuan
It's only a matter of time before the beleaguered U.S. dollar loses its status
as the world's reserve currency and medium of exchange, U.S. fund manager and
author Jim Rogers told Reuters in an interview.
"The dollar is a terribly flawed currency," said Rogers, who co-founded the
Quantum hedge fund with billionaire investor George Soros in the 1970s.
He urged investors to switch to the Brazilian real and Chinese yuan instead.
"You should hold as few dollars as possible. The dollar's decline would go on
for years to come," he added.
The dollar has so far lost nearly 12 percent against the euro this year, around
14 percent against sterling, and roughly 9 percent versus the Swiss franc, as
investors became concerned that U.S. economic growth was slowing and that the
interest rate differential with Europe may narrow.
Investors expect the Federal Reserve may cut the fed funds rate, currently at
5.25 percent, next year, eroding the greenback's yield advantage over other
major currencies.
The market's renewed focus on the widening U.S. current account deficit, a
measure of the country's trade and investment flows, has also contributed to the
dollar's recent decline, analysts say.
Rogers further outlined a gloomy scenario for the once-mighty dollar.
"As recent as 1987, the United States was a creditor nation. We are now the
largest debtor nation the world has ever seen," said Rogers.
"We owe the rest of the world over $13 trillion. And that's a terrifying
thought. Our foreign debt is increasing at the rate of $1 trillion every 15
months," he added.
More Worthy Investments In Brazil, China, Commodities
Rogers suggested holding currencies such as the Brazilian real, which has
appreciated by about 3.1 percent against the dollar since late November.
"The Brazilian currency will probably do better than most currencies for a few
years because it has so many commodities. It is a resource-based economy and
Brazil is doing a better job these days," he added.
Most analysts also expect the Brazilian currency to remain strong, specifically
in the first half of 2007 due to its sizable fiscal and current account
surpluses. Merrill Lynch, for instance, believes conditions are set for Brazil's
gross domestic product to accelerate in the fourth quarter and into 2007.
In a wide-ranging interview, Rogers, a long-time commodity bull who traveled
around 116 countries in 2000-2002 in a yellow Mercedes coupe, suggested getting
out of dollars and going into undervalued agricultural commodities.
"I suggest looking into coffee and soybeans. That's where you'll find the most
value," said Rogers. He estimated that prices of agricultural commodities are
more than 95 percent below their all-time highs when adjusted to inflation.
"We have a looming food shortage. The world is consuming more food and that it
is producing. The inventories are the lowest since 1972 and the number of
hectarage devoted to agricultural products has been declining," he noted.
Rogers also talked about one of his favorite topics — China. He said the 19th
century belonged to the British, the 20th century to America, and the 21st
century will be owned by China.
He traveled through China by motorcycle and car in the 1990s researching
investment ideas and collecting material for his books.
He said he is currently invested in the renminbi and Chinese stocks and is
planning to move to Asia in the near future to take advantage of the region's
growth story.
Rogers said the Chinese yuan could potentially replace the dollar as the world's
reserve currency in about 15-20 years provided the currency becomes freely
convertible.
"The renminbi would go higher over the years. They have a huge balance of
payments surplus and it's the largest creditor nation in the world."
© 2006 Reuters.
Editor's Note:
3. Retail Sales Surge in November
Consumers battered by a multitude of economic woes came roaring back in
November, pushing retail sales up by the largest amount in four months.
The nation's retailers saw sales rise by 1 percent last month, following three
straight months of lackluster performance. Sales were flat in August and had
fallen in September and October.
The November gain, which was the best showing since a 1.4 percent increase in
July, was coming at a critical time at the start of the holiday shopping season.
In other news, the amount of inventories held on shelves and backlots rose by
0.4 percent in October, after a 0.3 percent increase in September.
The increase in inventories was slightly below the 0.5 percent that economists
had been expecting but followed the pattern of moderate increases as businesses
have succeeded in keeping inventories under control even as the overall economy
has slowed this year.
The November retail sales performance was ten times better than the tiny
0.1 percent rise that economists had been forecasting. Still, it was unclear
whether the boom seen in November would carry over through the entire
Christmas shopping season.
Some economists cautioned that the November jump could turn out to be a
one-month blip rather than the start of a trend of stronger sales.
"We think it is very likely that sales will either be revised down or there will
be a hefty drop in December," said Ian Shepherdson, chief U.S. economist at High
Frequency Economics.
But other analysts said the rebound, while much stronger than expected, fit with
their view that consumer spending this holiday season will post solid, if not
spectacular, gains.
Many retail stores reported that customer traffic has not been as strong after a
surge right after Thanksgiving when consumers were lured into stores to take
advantage of attractive incentive deals.
Consumer spending slowed dramatically in the spring and summer as Americans were
hit with surging gasoline prices, which left them with little to spend on other
items. They also had to deal early in the year with rising interest rates, which
made their credit card purchases more expensive, and with a cooling housing
market, which made them feel less wealthy as the values of their homes slipped.
However, economists believe consumer spending is now stabilizing, reflecting in
part the retreat in gasoline prices from the record highs above $3 per gallon
set in the summer. Consumer spending is closely watched because it accounts for
two-thirds of total economic activity.
The 1 percent November increase reflected widespread strength in a number of
areas, led by a 4.6 percent surge at electronics and appliance stores as
customers snapped up the latest flat-screen televisions for holiday gift giving.
Sales at auto stores posted a solid 0.9 percent increase, which followed a
1 percent rise in October.
Department stores and other general merchandise stores posted a 0.4 percent rise
in November, a rebound after a 0.3 percent fall in October.
However, sales at specialty clothing stores were unchanged in November and sales
at furniture stores edged down 0.1 percent after an even bigger 0.7 percent fall
in October, weakness that reflected the big slowdown in home sales this year.
Sales at gasoline stations were up 2.3 percent in November following a
5.3 percent decline in October, a drop that reflected falling pump prices
rather than a lower volume of sales.
Excluding autos, sales were still up a solid 0.9 percent in November.
© 2006 Associated Press.
Editor's Note:
4. CEOs: Slower Economic Growth Ahead
U.S. chief executive officers see the pace of economic growth slowing slightly
over the next six months, according to a quarterly survey by the Business
Roundtable released Tuesday.
The group's CEO Economic Outlook Index came in at 81.9 in December, slightly
below the 82.4 reading in September. Any number higher than 50 indicates growth.
The dip in the fourth quarter was less pronounced than the third-quarter
decline, when the index fell to 82.4 from 98.6.
The more stable reading reflects the easing of energy prices, which have pulled
back from their summertime record highs.
"The modest downward drift of energy prices in recent months have probably
helped to steady CEO expectations about the economy in general," said Harold
McGraw, chairman, president and CEO of McGraw-Hill Cos. Inc. , who serves as
chairman of the Business Roundtable, on a conference call with journalists.
The survey showed CEO's top worry was health-care costs, as well as "the extent
to which the softening U.S. housing market will spill over into consumer
spending," McGraw added.
Executives also predicted somewhat slower growth in the U.S. economy next year,
calling for a 2.8 percent rise in gross domestic product, below the 3 percent
growth they'd expected three months ago.
The survey, conducted from Nov. 13 to Nov. 30, tallies the thoughts of 124 of
the group's 160 members, all large U.S. companies.
The majority of respondents — 69 percent — said they expected their companies'
sales to rise over the next six months. Among other questions, 39 percent
said they expected to increase capital spending over the next six months, with
13 percent saying they expected to cut.
About 37 percent said they expected to add to their companies' U.S. employment
over the next six months with 23 percent expecting to reduce their workforce.
The Roundtable's members employ some 10 million people and have a combined $4.5
trillion in annual revenue.
This week, companies like General Electric Co. and United Technologies Corp. set
their fiscal outlooks for 2007. GE said Tuesday that it sees global economic
growth continuing, setting the stage for 10 percent to 13 percent profit growth
for the company next year.
The Institute for Supply Management, a private group, also released data on
Tuesday showing that purchasing and supply executives in the manufacturing
sector expect business to pick up next year while those in the service sector
see a slowdown in the rate of expansion.
Executives in both sectors remained "optimistic" about the economy, the ISM
survey found. Manufacturing executives expected a 6.4 percent rise in revenue
next year, ahead of this year's 6.2 percent expected growth, while
service-sector executives forecast a similar 6.4 percent growth in 2007
revenues, lagging this year's forecast 7.7 percent rise.
© 2006 Reuters.
Editor's Note:
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