By Tracy Withers
Sept. 10 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will cut interest rates for the second time in seven weeks tomorrow as spending slows amid a recession, easing pressure on inflation.
The Reserve Bank will cut the official cash rate a quarter point to 7.75 percent, according to 13 of 14 economists surveyed by Bloomberg. One expects Bollard will lower the rate a half point when he announces his decision at 9 a.m. in Wellington.
Bollard cut borrowing costs in July for the first time in five years, and said further reductions are likely as the economy slows. The Treasury Department said this week the economy was in a recession in the first half of 2008 and may also contract in the third quarter amid a slump in housing investment and rising unemployment.
``The slowdown in the economy is well and truly entrenched and the inflation outlook has improved,'' said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. ``We continue to expect a cautious easing cycle.''
Bollard, 57, will cut the rate twice more this year, according to the economists surveyed by Bloomberg. The rate will be 6.75 percent by March, the lowest level since September 2005, they forecast.
The central bank will probably revise its forecast for the economy to show gross domestic product contracted in the second quarter, putting New Zealand in its first recession since 1998, said Tuffley. The economy shrank 0.3 percent in the first three months of the year.
Construction Slows
Construction fell 5.8 percent in the second quarter, according to a Sept. 8 government report. Retail spending dropped 1.4 percent, the most in 13 years. The government publishes second-quarter GDP figures on Sept. 26.
The Treasury Department this week reiterated it expects the economy shrank in the three months ended June, and said it couldn't rule out a further contraction in the three months through September.
The decline in domestic demand was led by record-high credit costs and soaring food and fuel prices, which curbed consumer spending and stalled the housing market.
The jobless rate rose to a two-year high in the second quarter and hiring intentions have declined.
``The New Zealand economy stalled in the first half, reducing company profits, so employers became more hesitant in their hiring plans,'' Catherine Lo-Giacco, general manager of Manpower New Zealand, said in a report yesterday.
House Sales
House prices fell 4.5 percent in August from a year earlier, according to the government valuation agency. That followed a 2.2 percent drop in July, the first decline since the series began in February 2005.
House sales fell to a 16-year low in June, before gaining in July as sellers lowered prices to complete deals, according to the Real Estate Institute.
While the economy stalls, high fuel and food prices have driven faster inflation. Consumer prices rose at the fastest pace in 18 years in the second quarter and the central bank forecasts the inflation rate will be close to 5 percent in the year to September.
``The Reserve Bank has no headroom and needs to limit the scope for flow-on into inflation expectations,'' said Robin Clements, chief New Zealand economist at UBS AG. ``There doesn't look to be a sense of urgency that would demand aggressive easing at this time.''
Bollard expects the inflation rate will slow to 3 percent by mid-2010. The central bank is required to keep average inflation between 1 percent and 3 percent.
Gasoline Prices
Gasoline prices have slumped 8 percent since Bollard's July 24 rate cut, adding to signs inflation may have peaked.
Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation.
The Reserve Bank of Australia this month lowered its benchmark for the first time in seven years as economic growth weakens. Governor Glenn Stevens said this week it may be six months before inflation eases.
The European Central Bank last week kept interest rates unchanged at a seven-year high, citing inflation concerns even as the euro-region economy contracted in the second quarter. The Bank of England kept its rate steady after economic growth stalled in the three months ended June 30.
Following is a table of forecasts for New Zealand's cash rate at the next three reviews, and the target at the end of the first and second quarters next year.
2008 2009
Sept. Oct. Dec. March June
Median 7.75% 7.5% 7.25% 6.75% 6.75%
------------------------------------------------------
4Cast 7.75% 7.75% 7.5% 7.25% 6.75%
ANZ National 7.75% 7.5% 7.25% 7.25% 7.0%
ASB Bank 7.75% 7.5% 7.25% 6.75% 6.75%
BNZ 7.75% 7.5% 7.25% 6.75% 6.25%
Barclays 7.75% 7.75% 7.5% 7.25% 7.0%
Citigroup 7.75% 7.5% 7.25% 6.75% 6.5%
Deutsche 7.75% 7.5% 7.25% 6.75% 6.25%
First NZ 7.75% 7.5% 7.25% 7.25% 7.0%
Goldman Sachs 7.75% 7.5% 7.25% 6.75% 6.0%
JPMorgan 7.75% 7.5% 7.25% 6.75% 6.25%
Macquarie 7.75% 7.5% 7.25% 6.75% 6.5%
RBC 7.5% 7.25% 7.0% 6.5% 6.25%
UBS 7.75% 7.5% 7.25% 6.75% 6.75%
Westpac 7.75% 7.5% 7.25% 7.0% 7.0%
======================================================
Tuesday, September 9, 2008
Monday, September 8, 2008
Fannie, Freddie Seizure Triggers Credit-Default Swaps (Update1)
By Shannon D. Harrington and Oliver Biggadike
Sept. 8 (Bloomberg) -- The government seizure of Fannie Mae and Freddie Mac triggered what may be the biggest settlement of credit-default swaps in the market's decade-long history.
The International Swaps and Derivatives Association will set rules by which parties to credit-default swap trades can demand payment on the net amount covered by the contracts, according to a statement today. According to an ISDA memo yesterday obtained by Bloomberg News, 13 Wall Street firms agreed unanimously that the government takeover of the biggest U.S. mortgage-finance companies qualified as a so-called credit event on contracts covering more than $1.4 trillion in Fannie and Freddie debt.
``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown,'' said Sarah Percy-Dove, the head of credit research at Colonial First State Global Asset Management in Sydney.
Because the government stands behind the companies' debt, which rallied on the news, the actual money exchanged between sellers and buyers of protection may be limited, analysts at CreditSights Inc. said. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent.
``If bonds rally and trade close to par, recovery could be close to 100 percent, with protection sellers having little to pay out despite a technical default,'' CreditSights analysts Richard Hofmann and Adam Steer wrote in a note to clients.
`Potential Significant Losses'
The settlement, however, may wipe out any market-value gains that investors or Wall Street firms were counting on, Bank of America Corp. strategists led by Jeffrey Rosenberg wrote in a note to clients yesterday.
That may spell ``potential significant losses at dealers from this event,'' the strategists wrote, though they said it will be relatively small compared with the more than $500 billion in credit losses and asset writedowns reported by the world's largest banks and securities firms since the start of last year.
Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed Freddie and Fannie in conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of preferred stock in the firms to keep them solvent.
Credit-default swaps on Fannie and Freddie debt have been among the most actively traded individual contracts the past few months, according to reports from broker GFI Group Inc. Dealers don't disclose the amount outstanding.
Fannie and Freddie also are among 125 companies in the benchmark Markit CDX North America Investment Grade Index, the most actively traded contract in credit markets.
Money Exchange
Dealers today were quoting the CDX index contracts both with and without Fannie and Freddie. Contracts with the companies dropped 7 basis points to 138 basis points as of 3:45 p.m. in New York, according to broker Phoenix Partners Group. Contracts without the companies were trading 1.5 basis points to 2 basis points tighter, according to Credit Derivatives Research LLC.
That would imply the market has priced in a recovery rate, as a percentage of total value, ``in the mid-to-high 90s,'' said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California, meaning investors who bought protection would get five cents on the dollar or less to settle.
Five-year contracts on the senior debt of Fannie and Freddie had been trading at about 38 basis points on Sept. 5, according to CMA Datavision. That's down from 81 basis points on July 10. Contracts on Fannie subordinated debt fell from a record high of 364 basis points on Aug. 20 and closed on Sept. 5 at 233 basis points, CMA prices show. The cost is equivalent to $233,000 annually to protect $10 million in notes from default.
A `Unique Situation'
Under the process being created by ISDA, investors will have the option to settle without an actual exchange of the underlying bonds. Wall Street firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other market makers will hold an auction to determine a recovery value for the securities. Investors who agree to a cash settlement would exchange the difference between the recovery value set at auction and the face value on a contract.
Because investors have the option to settle contracts using the cheapest qualifying bond, and because bonds with longer maturities can continue to trade at a discount because of interest rate risks, it's too early to assume that the recovery level will be at or almost at par value, said Morgan Stanley strategist Sivan Mahadevan.
``It is a unique situation,'' Mahadevan said on a conference call with clients today.
Sept. 8 (Bloomberg) -- The government seizure of Fannie Mae and Freddie Mac triggered what may be the biggest settlement of credit-default swaps in the market's decade-long history.
The International Swaps and Derivatives Association will set rules by which parties to credit-default swap trades can demand payment on the net amount covered by the contracts, according to a statement today. According to an ISDA memo yesterday obtained by Bloomberg News, 13 Wall Street firms agreed unanimously that the government takeover of the biggest U.S. mortgage-finance companies qualified as a so-called credit event on contracts covering more than $1.4 trillion in Fannie and Freddie debt.
``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown,'' said Sarah Percy-Dove, the head of credit research at Colonial First State Global Asset Management in Sydney.
Because the government stands behind the companies' debt, which rallied on the news, the actual money exchanged between sellers and buyers of protection may be limited, analysts at CreditSights Inc. said. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent.
``If bonds rally and trade close to par, recovery could be close to 100 percent, with protection sellers having little to pay out despite a technical default,'' CreditSights analysts Richard Hofmann and Adam Steer wrote in a note to clients.
`Potential Significant Losses'
The settlement, however, may wipe out any market-value gains that investors or Wall Street firms were counting on, Bank of America Corp. strategists led by Jeffrey Rosenberg wrote in a note to clients yesterday.
That may spell ``potential significant losses at dealers from this event,'' the strategists wrote, though they said it will be relatively small compared with the more than $500 billion in credit losses and asset writedowns reported by the world's largest banks and securities firms since the start of last year.
Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed Freddie and Fannie in conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of preferred stock in the firms to keep them solvent.
Credit-default swaps on Fannie and Freddie debt have been among the most actively traded individual contracts the past few months, according to reports from broker GFI Group Inc. Dealers don't disclose the amount outstanding.
Fannie and Freddie also are among 125 companies in the benchmark Markit CDX North America Investment Grade Index, the most actively traded contract in credit markets.
Money Exchange
Dealers today were quoting the CDX index contracts both with and without Fannie and Freddie. Contracts with the companies dropped 7 basis points to 138 basis points as of 3:45 p.m. in New York, according to broker Phoenix Partners Group. Contracts without the companies were trading 1.5 basis points to 2 basis points tighter, according to Credit Derivatives Research LLC.
That would imply the market has priced in a recovery rate, as a percentage of total value, ``in the mid-to-high 90s,'' said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California, meaning investors who bought protection would get five cents on the dollar or less to settle.
Five-year contracts on the senior debt of Fannie and Freddie had been trading at about 38 basis points on Sept. 5, according to CMA Datavision. That's down from 81 basis points on July 10. Contracts on Fannie subordinated debt fell from a record high of 364 basis points on Aug. 20 and closed on Sept. 5 at 233 basis points, CMA prices show. The cost is equivalent to $233,000 annually to protect $10 million in notes from default.
A `Unique Situation'
Under the process being created by ISDA, investors will have the option to settle without an actual exchange of the underlying bonds. Wall Street firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other market makers will hold an auction to determine a recovery value for the securities. Investors who agree to a cash settlement would exchange the difference between the recovery value set at auction and the face value on a contract.
Because investors have the option to settle contracts using the cheapest qualifying bond, and because bonds with longer maturities can continue to trade at a discount because of interest rate risks, it's too early to assume that the recovery level will be at or almost at par value, said Morgan Stanley strategist Sivan Mahadevan.
``It is a unique situation,'' Mahadevan said on a conference call with clients today.
Friday, September 5, 2008
U.S. Stocks Advance as Rally in Banks Overshadows Drop in Jobs
By Lynn Thomasson
Sept. 5 (Bloomberg) -- U.S. stocks gained, paring the worst weekly loss for the Standard & Poor's 500 Index since May, on speculation Lehman Brothers Holdings Inc. will raise capital and investor Barton Biggs' prediction the market is near a bottom.
Lehman rallied 6.8 percent on a Reuters report the securities firm may sell assets to Blackstone Group LP and Kohlberg Kravis Roberts & Co. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. climbed more than 4 percent as banks also benefited from growing expectations the Federal Reserve will hold off raising interest rates.
``We're probably somewhere pretty close to a bottom, at least an intermediate-term bottom, from which we can mount a fairly powerful rally,'' Biggs, who runs the hedge fund Traxis Partners LLC, told Bloomberg Television.
Bank gains overpowered earlier declines of more than 1 percent in the S&P 500 and Dow Jones Industrial Average following a jump in the unemployment rate to a five-year high. The S&P 500 added 5.48 points, or 0.4 percent, to 1,242.31. The Dow rose 32.73, or 0.3 percent, to 11,220.96. The Nasdaq Composite Index slipped 3.16 to 2,255.88. About six stocks rose for every five that fell on the New York Stock Exchange.
Stocks tumbled in the morning after the government report showing an unemployment rate of 6.1 percent added to concern that the worst housing slump since the Great Depression and more than $500 billion in credit losses and writedowns at global banks are dragging the nation into a recession.
The S&P 500 pared its weekly loss to 3.2 percent and the Dow reduced its weekly retreat to 2.8 percent. The MSCI World Index tumbled 5.8 percent in the week, its steepest drop since the first week of trading after the September 2001 terrorist attacks.
Bank of America gained 5.3 percent to $32.23. Citigroup added 4.2 percent to $19.07. JPMorgan increased 4.5 percent to $39.60.
Lehman Rally
Lehman rose for the seventh time in eight trading session, adding 6.8 percent to $16.20. Blackstone Kohlberg Kravis Roberts may buy some of the company's assets, including real-estate holdings and part of the asset-management unit, Reuters reported, citing unidentified sources familiar with the situation. Lehman's real-estate unit may be worth about $5 billion, the news agency said. Randy Whitestone, a Lehman spokesman, declined to comment.
Lehman rose to its highest level of the day after financial commentator James Cramer said on CNBC that the stock is a ``screaming buy'' whose business is unlikely to worsen.
Financial shares climbed 3.2 percent, the most among 10 S&P 500 industries. Fannie Mae, the largest U.S. mortgage-finance company, added 9.7 percent to $7.04. Wachovia Corp., the fourth- largest U.S. bank, increased 7.9 percent to $16.75.
The gain in banks came even as foreclosures rose above 1 percent in the second-quarter for the first time since the Mortgage Bankers Association began its loan survey 29 years ago, as people walked away from homes they couldn't refinance or sell.
`Real Opportunity'
``The headlines are screaming adversity, but if you look below it all you'll see real opportunity,'' said Hans Olsen, who helps oversee $120 billion as chief investment officer of JPMorgan Private Wealth Management in New York.
Mining companies and chemical producers in the S&P 500 added 1.1 percent. Morgan Stanley analysts called recent declines in fertilizer stocks ``unfounded'' and predicted the group would see the highest earnings in 2011.
Monsanto Co. increased 3.4 percent to $107.19. Credit Suisse Group AG told investors to buy shares of the world's biggest seed producer. CF Industries Holdings Inc., the maker of nitrogen and phosphate fertilizers, rose the most among raw-material producers in the S&P 500 with a 6.3 percent gain to $131.20.
M&A Speculation
SanDisk Corp. had the biggest gain in more than eight years, soaring 31 percent to $17.64. Samsung Electronics Co. said it may buy the memory-card maker in what would be the South Korean company's biggest acquisition. Samsung, the world's second- largest chipmaker after Intel Corp., said it's considering various options, including an acquisition.
UST Inc. added 25 percent to $67.55. Altria Group Inc., the largest U.S. cigarette maker, is in talks to buy the nation's biggest snuff producer for more than $10 billion, the New York Times reported, citing people with knowledge of the discussions who weren't identified.
Exxon Mobil Corp., Chevron Corp. and ConocoPhillips fell as oil futures sank to a five-month low of $106.23 a barrel in New York. Energy producers in the benchmark index slumped 0.5 percent for a sixth straight retreat, the longest period of declines since 2002.
Utility stocks dropped the most among 10 S&P industries after Sanford C. Bernstein and Atlantic Equities analysts cut profit estimates for Exelon Corp., the largest U.S. owner of nuclear-power plants. The company, which lowered its forecast yesterday, lost 8 percent to $64.97 for the steepest retreat since 2001.
Europe, Asia
Stocks in Europe and Asia fell today on concern weakening economic growth will curb earnings at semiconductor makers while credit-related losses at banks increase.
``We're clearly in a bear market,'' Simon Moss, who manages the equivalent of $4.1 billion as investment director of U.S. equities at Scottish Widows Investment Partnership in Edinburgh, said in a Bloomberg Television interview. ``There is no doubt the economy is slowing.''
The employment report spurred investors to increase bets the Federal Reserve will hold interest rates steady for the rest of the year. Odds policy makers will leave the target rate for overnight loans between banks unchanged through January rose to 79 percent from 63 percent yesterday, futures trading shows.
The average price-earnings multiple of the S&P 500 has declined more than 5 percent from a five-year high of 26.2 on Aug. 15. The index is trading for 24.98 times profits in the last 12 months, or 14.8 times analysts' earnings estimates.
Companies in the S&P 500 are forecast to report profits in the fourth quarter that are 42 percent higher than a year ago, the biggest increase ever. Financial company earnings are projected to rise more almost five-fold, while income at mining and chemical companies may increase 35 percent.
Sept. 5 (Bloomberg) -- U.S. stocks gained, paring the worst weekly loss for the Standard & Poor's 500 Index since May, on speculation Lehman Brothers Holdings Inc. will raise capital and investor Barton Biggs' prediction the market is near a bottom.
Lehman rallied 6.8 percent on a Reuters report the securities firm may sell assets to Blackstone Group LP and Kohlberg Kravis Roberts & Co. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. climbed more than 4 percent as banks also benefited from growing expectations the Federal Reserve will hold off raising interest rates.
``We're probably somewhere pretty close to a bottom, at least an intermediate-term bottom, from which we can mount a fairly powerful rally,'' Biggs, who runs the hedge fund Traxis Partners LLC, told Bloomberg Television.
Bank gains overpowered earlier declines of more than 1 percent in the S&P 500 and Dow Jones Industrial Average following a jump in the unemployment rate to a five-year high. The S&P 500 added 5.48 points, or 0.4 percent, to 1,242.31. The Dow rose 32.73, or 0.3 percent, to 11,220.96. The Nasdaq Composite Index slipped 3.16 to 2,255.88. About six stocks rose for every five that fell on the New York Stock Exchange.
Stocks tumbled in the morning after the government report showing an unemployment rate of 6.1 percent added to concern that the worst housing slump since the Great Depression and more than $500 billion in credit losses and writedowns at global banks are dragging the nation into a recession.
The S&P 500 pared its weekly loss to 3.2 percent and the Dow reduced its weekly retreat to 2.8 percent. The MSCI World Index tumbled 5.8 percent in the week, its steepest drop since the first week of trading after the September 2001 terrorist attacks.
Bank of America gained 5.3 percent to $32.23. Citigroup added 4.2 percent to $19.07. JPMorgan increased 4.5 percent to $39.60.
Lehman Rally
Lehman rose for the seventh time in eight trading session, adding 6.8 percent to $16.20. Blackstone Kohlberg Kravis Roberts may buy some of the company's assets, including real-estate holdings and part of the asset-management unit, Reuters reported, citing unidentified sources familiar with the situation. Lehman's real-estate unit may be worth about $5 billion, the news agency said. Randy Whitestone, a Lehman spokesman, declined to comment.
Lehman rose to its highest level of the day after financial commentator James Cramer said on CNBC that the stock is a ``screaming buy'' whose business is unlikely to worsen.
Financial shares climbed 3.2 percent, the most among 10 S&P 500 industries. Fannie Mae, the largest U.S. mortgage-finance company, added 9.7 percent to $7.04. Wachovia Corp., the fourth- largest U.S. bank, increased 7.9 percent to $16.75.
The gain in banks came even as foreclosures rose above 1 percent in the second-quarter for the first time since the Mortgage Bankers Association began its loan survey 29 years ago, as people walked away from homes they couldn't refinance or sell.
`Real Opportunity'
``The headlines are screaming adversity, but if you look below it all you'll see real opportunity,'' said Hans Olsen, who helps oversee $120 billion as chief investment officer of JPMorgan Private Wealth Management in New York.
Mining companies and chemical producers in the S&P 500 added 1.1 percent. Morgan Stanley analysts called recent declines in fertilizer stocks ``unfounded'' and predicted the group would see the highest earnings in 2011.
Monsanto Co. increased 3.4 percent to $107.19. Credit Suisse Group AG told investors to buy shares of the world's biggest seed producer. CF Industries Holdings Inc., the maker of nitrogen and phosphate fertilizers, rose the most among raw-material producers in the S&P 500 with a 6.3 percent gain to $131.20.
M&A Speculation
SanDisk Corp. had the biggest gain in more than eight years, soaring 31 percent to $17.64. Samsung Electronics Co. said it may buy the memory-card maker in what would be the South Korean company's biggest acquisition. Samsung, the world's second- largest chipmaker after Intel Corp., said it's considering various options, including an acquisition.
UST Inc. added 25 percent to $67.55. Altria Group Inc., the largest U.S. cigarette maker, is in talks to buy the nation's biggest snuff producer for more than $10 billion, the New York Times reported, citing people with knowledge of the discussions who weren't identified.
Exxon Mobil Corp., Chevron Corp. and ConocoPhillips fell as oil futures sank to a five-month low of $106.23 a barrel in New York. Energy producers in the benchmark index slumped 0.5 percent for a sixth straight retreat, the longest period of declines since 2002.
Utility stocks dropped the most among 10 S&P industries after Sanford C. Bernstein and Atlantic Equities analysts cut profit estimates for Exelon Corp., the largest U.S. owner of nuclear-power plants. The company, which lowered its forecast yesterday, lost 8 percent to $64.97 for the steepest retreat since 2001.
Europe, Asia
Stocks in Europe and Asia fell today on concern weakening economic growth will curb earnings at semiconductor makers while credit-related losses at banks increase.
``We're clearly in a bear market,'' Simon Moss, who manages the equivalent of $4.1 billion as investment director of U.S. equities at Scottish Widows Investment Partnership in Edinburgh, said in a Bloomberg Television interview. ``There is no doubt the economy is slowing.''
The employment report spurred investors to increase bets the Federal Reserve will hold interest rates steady for the rest of the year. Odds policy makers will leave the target rate for overnight loans between banks unchanged through January rose to 79 percent from 63 percent yesterday, futures trading shows.
The average price-earnings multiple of the S&P 500 has declined more than 5 percent from a five-year high of 26.2 on Aug. 15. The index is trading for 24.98 times profits in the last 12 months, or 14.8 times analysts' earnings estimates.
Companies in the S&P 500 are forecast to report profits in the fourth quarter that are 42 percent higher than a year ago, the biggest increase ever. Financial company earnings are projected to rise more almost five-fold, while income at mining and chemical companies may increase 35 percent.
Thursday, September 4, 2008
U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says (Update3)
By Jody Shenn
Sept. 4 (Bloomberg) -- The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.
Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor's 500 Index has fallen 13 percent and home prices are down more than 15 percent. Yields on investment-grade corporate bonds, debt backed by commercial mortgages as well as credit cards reached record highs last month relative to benchmark rates.
`Mom and Pop'
Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners' debt and then refinance them into government-insured loans.
Pimco, a unit of Munich-based Allianz SE, is seeking to take advantage of declines in home-loan bonds. The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter. The Distressed Senior Credit Opportunities Fund will invest in securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private.
Paulson Rescue
Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
U.S. Treasury Secretary Henry Paulson arranged a rescue package for Washington-based Fannie and Freddie of McLean, Virginia as concern escalated the government-chartered companies didn't have capital to withstand the housing slump. Treasury pledged to pump unlimited debt or equity into the companies should they need it.
As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless ``new balance sheets'' emerge, prices of almost all assets will drop, even those of ``impeccable'' quality, he said.
`Anorexic' Appetite
The extra yield demanded on Ginnie Mae's 30-year, current- coupon mortgage-backed securities over 10-year Treasuries has climbed to 1.75 percentage points, from 0.87 percentage points at the start of last year, according to data compiled by Bloomberg. Bonds guaranteed by the U.S. agency are backed by the U.S. government. Spreads on 2-year AAA rated bonds composed of federally backed student loans have climbed to 0.95 percentage points over benchmark rates, from 0.01 percentage points below, Deutsche Bank AG data show.
``There is an increasing reluctance on the part of the private market to risk any more of its own capital,'' Gross said. ``Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.''
Home Prices
The decline in home prices hasn't been seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as the effects ripple through markets, Gross said. Home prices in 20 of the largest U.S. metropolitan areas fell 15.9 percent in June from a year earlier, according to an S&P/Case-Shiller index.
Fannie and Freddie 30-year fixed-rate mortgage bond yields, which influence the rates on most new home loans, have probably risen 75 basis points because of the waning demand, Gross said. A basis point is 0.01 percentage point.
The Pimco Total Return Fund returned 9.8 percent in the past 12 months, beating 97 percent of its peers in the government and corporate bond fund category as of Sept. 3, according to Bloomberg data. The returns are 5.76 percent annually over five years. Pimco has about $830 billion of assets under management.
About 61 percent of Gross's holdings were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or Ginnie Mae, according to data on Pimco's Web site.
``In a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand,'' Gross said.
Sept. 4 (Bloomberg) -- The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.
Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor's 500 Index has fallen 13 percent and home prices are down more than 15 percent. Yields on investment-grade corporate bonds, debt backed by commercial mortgages as well as credit cards reached record highs last month relative to benchmark rates.
`Mom and Pop'
Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners' debt and then refinance them into government-insured loans.
Pimco, a unit of Munich-based Allianz SE, is seeking to take advantage of declines in home-loan bonds. The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter. The Distressed Senior Credit Opportunities Fund will invest in securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private.
Paulson Rescue
Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
U.S. Treasury Secretary Henry Paulson arranged a rescue package for Washington-based Fannie and Freddie of McLean, Virginia as concern escalated the government-chartered companies didn't have capital to withstand the housing slump. Treasury pledged to pump unlimited debt or equity into the companies should they need it.
As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless ``new balance sheets'' emerge, prices of almost all assets will drop, even those of ``impeccable'' quality, he said.
`Anorexic' Appetite
The extra yield demanded on Ginnie Mae's 30-year, current- coupon mortgage-backed securities over 10-year Treasuries has climbed to 1.75 percentage points, from 0.87 percentage points at the start of last year, according to data compiled by Bloomberg. Bonds guaranteed by the U.S. agency are backed by the U.S. government. Spreads on 2-year AAA rated bonds composed of federally backed student loans have climbed to 0.95 percentage points over benchmark rates, from 0.01 percentage points below, Deutsche Bank AG data show.
``There is an increasing reluctance on the part of the private market to risk any more of its own capital,'' Gross said. ``Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.''
Home Prices
The decline in home prices hasn't been seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as the effects ripple through markets, Gross said. Home prices in 20 of the largest U.S. metropolitan areas fell 15.9 percent in June from a year earlier, according to an S&P/Case-Shiller index.
Fannie and Freddie 30-year fixed-rate mortgage bond yields, which influence the rates on most new home loans, have probably risen 75 basis points because of the waning demand, Gross said. A basis point is 0.01 percentage point.
The Pimco Total Return Fund returned 9.8 percent in the past 12 months, beating 97 percent of its peers in the government and corporate bond fund category as of Sept. 3, according to Bloomberg data. The returns are 5.76 percent annually over five years. Pimco has about $830 billion of assets under management.
About 61 percent of Gross's holdings were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or Ginnie Mae, according to data on Pimco's Web site.
``In a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand,'' Gross said.
ECB Will Tighten Lending Rules to Stop Bank Abuse (Update2)
By Christian Vits
Sept. 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet made it harder for financial institutions stung by the year-long credit crisis to exploit its lending rules.
Trichet said he'll make it more expensive for banks to borrow from the ECB against most asset-based securities from Feb. 1. The ECB will increase the so-called `haircut' on the securities to 12 percent from as little as 2 percent, meaning it will lend just 88 percent of the value of the paper. Paper without a market price faces an additional 4.4 percent discount.
The ECB is concerned its money-market rules are being abused by banks trying to unload securities damaged by the credit rout in return for central bank funds. Europe's financial institutions stepped up their borrowing from the ECB, whose lending rules are looser than the Bank of England's, after the U.S. subprime mortgage collapse derailed financial markets a year ago.
``This is clearly bad news for the profit and loss of banks, especially Spanish and Irish-based ones, that have retained asset- backed securities,'' said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``ECB financing is a significant feature of their balance sheet.''
The cost of protecting European bank bonds from default soared to the highest in five months after Trichet announced the changes to the so-called haircuts, or risk premia, it applies to collateral. Credit-default swaps on the Markit iTraxx Financial index of subordinated debt of 25 European banks and insurers climbed 13 basis points to 178, the highest since April 1, according to JPMorgan Chase & Co. prices at 4:10 p.m. in London.
`Gaming System'
The ECB said it will raise the haircut on unsecured bank bonds by 5 percentage points.
ECB council member Yves Mersch foreshadowed today's announcement when he said in an interview in Jackson Hole, Wyoming, last month that the central bank is concerned that some financial institutions are ``gaming the system.''
Trichet made today's announcement after the ECB left its benchmark interest rate at 4.25 percent. He said the central bank remains focused on fighting inflation even after cutting its economic growth forecasts for this year and next.
The bank today lowered its 2008 economic growth forecast to about 1.4 percent from 1.8 percent and raised its inflation forecast to about 3.5 percent from 3.4 percent.
`Uniform' Risk Premium
Trichet said the ECB will apply a ``uniform'' risk premium of 12 percent on asset-backed securities. This haircut is meant to protect the ECB against a decline in the value of the assets.
The ``valuation haircuts'' on asset-backed securities currently range from 2 percent to 18 percent. The rule changes increase the haircuts in 10 out of 12 categories of the securities.
The value of the underlying asset is calculated as the market price less the haircut. An increase in the haircut therefore reduces the amount that can be borrowed, making banks more dependent on investors who are demanding higher returns before committing funds.
Trichet said the ECB hopes that the changes ``will have a positive impact'' by helping the market become ``more active.''
``We don't think it would hamper the way the system is functioning,'' Trichet said. ``It's a small fraction in the present total amount of collateral.''
The share of asset-backed securities deposited as collateral with the Eurosystem jumped by a third last year. Asset-backed securities in 2007 amounted to 16 percent of the total deposited.
`Burning House'
``The situation on the credit market is like a burning house and central banks are unsuccessfully trying to extinguish the flames,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``The crisis is far from over.''
Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe.
``Spain will be especially hit because they were large issuers'' of asset-backed securities, said Sylvain Broyer, an economist at Natixis in Frankfurt. ``If market conditions don't improve'' by the time the measures are implemented, ``it will hurt banks' earnings.''
At the moment, banks holding Spanish asset-backed securities can get money cheaper at central-bank auctions than through investors. A Spanish mortgage-backed bond rated at the highest credit rating trades with a spread of about 3 percentage points to the euro interbank offered rate, or Euribor. The resulting rate of 7.96 percent compares with an average rate of 4.74 percent at last week's ECB auction for three-month money.
Still, the Bank of Spain said the changes to the ECB's collateral rules will have no impact on the funding position or profits of Spanish lenders.
The new restrictions will reduce the amount of money Spanish banks can borrow from the ECB against asset-backed securities by at most 14.4 percent, said a central bank official who asked not to be named. That still leaves the Spanish financial system with a ``very large'' amount of surplus collateral, so banks will see no change in the cost or availability of central bank funds, the official said.
Sept. 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet made it harder for financial institutions stung by the year-long credit crisis to exploit its lending rules.
Trichet said he'll make it more expensive for banks to borrow from the ECB against most asset-based securities from Feb. 1. The ECB will increase the so-called `haircut' on the securities to 12 percent from as little as 2 percent, meaning it will lend just 88 percent of the value of the paper. Paper without a market price faces an additional 4.4 percent discount.
The ECB is concerned its money-market rules are being abused by banks trying to unload securities damaged by the credit rout in return for central bank funds. Europe's financial institutions stepped up their borrowing from the ECB, whose lending rules are looser than the Bank of England's, after the U.S. subprime mortgage collapse derailed financial markets a year ago.
``This is clearly bad news for the profit and loss of banks, especially Spanish and Irish-based ones, that have retained asset- backed securities,'' said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``ECB financing is a significant feature of their balance sheet.''
The cost of protecting European bank bonds from default soared to the highest in five months after Trichet announced the changes to the so-called haircuts, or risk premia, it applies to collateral. Credit-default swaps on the Markit iTraxx Financial index of subordinated debt of 25 European banks and insurers climbed 13 basis points to 178, the highest since April 1, according to JPMorgan Chase & Co. prices at 4:10 p.m. in London.
`Gaming System'
The ECB said it will raise the haircut on unsecured bank bonds by 5 percentage points.
ECB council member Yves Mersch foreshadowed today's announcement when he said in an interview in Jackson Hole, Wyoming, last month that the central bank is concerned that some financial institutions are ``gaming the system.''
Trichet made today's announcement after the ECB left its benchmark interest rate at 4.25 percent. He said the central bank remains focused on fighting inflation even after cutting its economic growth forecasts for this year and next.
The bank today lowered its 2008 economic growth forecast to about 1.4 percent from 1.8 percent and raised its inflation forecast to about 3.5 percent from 3.4 percent.
`Uniform' Risk Premium
Trichet said the ECB will apply a ``uniform'' risk premium of 12 percent on asset-backed securities. This haircut is meant to protect the ECB against a decline in the value of the assets.
The ``valuation haircuts'' on asset-backed securities currently range from 2 percent to 18 percent. The rule changes increase the haircuts in 10 out of 12 categories of the securities.
The value of the underlying asset is calculated as the market price less the haircut. An increase in the haircut therefore reduces the amount that can be borrowed, making banks more dependent on investors who are demanding higher returns before committing funds.
Trichet said the ECB hopes that the changes ``will have a positive impact'' by helping the market become ``more active.''
``We don't think it would hamper the way the system is functioning,'' Trichet said. ``It's a small fraction in the present total amount of collateral.''
The share of asset-backed securities deposited as collateral with the Eurosystem jumped by a third last year. Asset-backed securities in 2007 amounted to 16 percent of the total deposited.
`Burning House'
``The situation on the credit market is like a burning house and central banks are unsuccessfully trying to extinguish the flames,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``The crisis is far from over.''
Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe.
``Spain will be especially hit because they were large issuers'' of asset-backed securities, said Sylvain Broyer, an economist at Natixis in Frankfurt. ``If market conditions don't improve'' by the time the measures are implemented, ``it will hurt banks' earnings.''
At the moment, banks holding Spanish asset-backed securities can get money cheaper at central-bank auctions than through investors. A Spanish mortgage-backed bond rated at the highest credit rating trades with a spread of about 3 percentage points to the euro interbank offered rate, or Euribor. The resulting rate of 7.96 percent compares with an average rate of 4.74 percent at last week's ECB auction for three-month money.
Still, the Bank of Spain said the changes to the ECB's collateral rules will have no impact on the funding position or profits of Spanish lenders.
The new restrictions will reduce the amount of money Spanish banks can borrow from the ECB against asset-backed securities by at most 14.4 percent, said a central bank official who asked not to be named. That still leaves the Spanish financial system with a ``very large'' amount of surplus collateral, so banks will see no change in the cost or availability of central bank funds, the official said.
Monday, September 1, 2008
Japan's Stocks May Fall on Prime Minister Resignation, Oil Drop
By Kanoko Matsuyama and Toshiro Hasegawa
Sept. 2 (Bloomberg) -- Japan's stocks may fall following the resignation of the nation's prime minister, and after crude fell to the lowest in more than four months, diminishing the earnings prospects for oil explorers.
``The political chaos is not positive, but it's difficult to sell aggressively because it may hasten the timing of a general election,'' said Mamoru Shimode, Tokyo-based chief equity strategist at Deutsche Bank AG, in an interview with Bloomberg Television. ``Stocks related to energy and natural resources will be affected by the drop in oil.''
Japan Prime Minister Yasuo Fukuda resigned yesterday after less than a year in office marked by political gridlock, plunging approval ratings and disarray within the ruling Liberal Democratic Party.
Crude fell 3.8 percent to $111.22 a barrel in electronic trading in New York after Hurricane Gustav made landfall as a weaker-than-expected storm, easing concern of damage to rigs and refineries in the U.S. Gulf Coast.
Crude is 24 percent below the record of $147.27 a barrel reached July 11, during which Inpex Holdings Inc., Japan's biggest oil explorer, has lost 7.8 percent.
Japan's currency climbed to 107.63 per dollar, the strongest since Aug. 4. A stronger yen lowers the value of Japanese companies' repatriated sales.
The Nikkei 225 Stock Average dropped 238.69, or 1.8 percent, to close at 12,834.18 in Tokyo. The broader Topix index declined 24.07, or 1.9 percent, to 1,230.64. Both gauges retreated the most since Aug. 19. U.S. markets were closed yesterday for the Labor Day holiday.
In the past 12 years, a change in Cabinets preceded an average 1 percent drop in the Nikkei 225 Stock Average in the following month, according to data compiled by Bloomberg News. Japan's Cabinets have been reconstituted 20 times either by election or reshuffle in that period. The Nikkei has fallen 2 percent since the last change in Cabinet on Aug. 1.
Mitsubishi UFJ Financial Group Inc., Japan's largest listed bank, and Mizuho Financial Group Inc., the second biggest, were cut to ``sell'' from ``neutral'' and to ``neutral'' from ``buy'' respectively by Toyoki Sameshima at Goldman Sachs Group Inc.
Sept. 2 (Bloomberg) -- Japan's stocks may fall following the resignation of the nation's prime minister, and after crude fell to the lowest in more than four months, diminishing the earnings prospects for oil explorers.
``The political chaos is not positive, but it's difficult to sell aggressively because it may hasten the timing of a general election,'' said Mamoru Shimode, Tokyo-based chief equity strategist at Deutsche Bank AG, in an interview with Bloomberg Television. ``Stocks related to energy and natural resources will be affected by the drop in oil.''
Japan Prime Minister Yasuo Fukuda resigned yesterday after less than a year in office marked by political gridlock, plunging approval ratings and disarray within the ruling Liberal Democratic Party.
Crude fell 3.8 percent to $111.22 a barrel in electronic trading in New York after Hurricane Gustav made landfall as a weaker-than-expected storm, easing concern of damage to rigs and refineries in the U.S. Gulf Coast.
Crude is 24 percent below the record of $147.27 a barrel reached July 11, during which Inpex Holdings Inc., Japan's biggest oil explorer, has lost 7.8 percent.
Japan's currency climbed to 107.63 per dollar, the strongest since Aug. 4. A stronger yen lowers the value of Japanese companies' repatriated sales.
The Nikkei 225 Stock Average dropped 238.69, or 1.8 percent, to close at 12,834.18 in Tokyo. The broader Topix index declined 24.07, or 1.9 percent, to 1,230.64. Both gauges retreated the most since Aug. 19. U.S. markets were closed yesterday for the Labor Day holiday.
In the past 12 years, a change in Cabinets preceded an average 1 percent drop in the Nikkei 225 Stock Average in the following month, according to data compiled by Bloomberg News. Japan's Cabinets have been reconstituted 20 times either by election or reshuffle in that period. The Nikkei has fallen 2 percent since the last change in Cabinet on Aug. 1.
Mitsubishi UFJ Financial Group Inc., Japan's largest listed bank, and Mizuho Financial Group Inc., the second biggest, were cut to ``sell'' from ``neutral'' and to ``neutral'' from ``buy'' respectively by Toyoki Sameshima at Goldman Sachs Group Inc.
Australia May Cut Rate for First Time Since 2001, Signal More
By Jacob Greber
Sept. 2 (Bloomberg) -- Australia's central bank will probably cut its benchmark interest rate for the first time in seven years and may signal further reductions in coming months as the nation's 17-year economic expansion slows.
Governor Glenn Stevens will lower the overnight cash rate target by a quarter point to 7 percent today, according to 22 of 23 economists surveyed by Bloomberg News. The decision will be announced at 2:30 p.m. in Sydney.
The biggest slump in retail sales in six years, tumbling business confidence and evidence of slower jobs growth prompted Stevens to say last month that he may soon cut rates to avoid a ``deeper and more persistent'' economic slowdown. Gross domestic product expanded by the least in two years in the June quarter, economists surveyed ahead of a Sept. 3 report forecast.
``The Reserve Bank looks set to cut by a quarter point, and will probably cut again in October,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``The central bank has overseen a rise in interest rates to levels that have killed the inclination to expand for many households and businesses.''
The bank has added 300 basis points to the benchmark rate since December 2001, when it was 4.25 percent.
Policy makers last raised borrowing costs in March, for a second straight month, to curb consumer prices that jumped 4.5 percent in the second quarter. Stevens aims to keep annual inflation between 2 percent and 3 percent on average.
Economic Growth
Since the bank's last meeting on Aug. 5, reports have shown new home sales fell to a two-year low and lending to consumers and businesses rose at the slowest annual pace since 2002. Companies including Qantas Airways Ltd., Ford Motor Co. and Starbucks Corp. have announced job cuts.
The government will publish a report tomorrow at 11:30 a.m. in Sydney showing second-quarter gross domestic product rose 0.4 percent from the previous three months, when it expanded 0.6 percent, according to the median estimate of 23 economists surveyed by Bloomberg.
``We expect a relatively guarded statement from the Reserve Bank that recognizes the slowdown in growth, and the still persistent concerns about inflation and the present stimulus from commodity prices,'' said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney.
Stevens, along with his counterparts in Europe, Asia and the U.S., faces the challenge of balancing slowing household spending, which accounts for about 60 percent of Australia's $1 trillion economy, with the threat that inflation will accelerate amid rising energy costs and a shortage of skilled labor.
Exports to China
``The scarcity of labor in Australia is now acute'' and it will ``have a negative impact on BHP Billiton Ltd.,'' Don Argus, chairman of the world's biggest mining company, said at a business forum in Canberra yesterday.
Surging demand from China will increase Australia's export income by 20 percent this year, the central bank estimates, offsetting slower domestic growth and boosting profits at miners including BHP Billiton. A report showed yesterday that company profits surged in the second quarter by the most in more than seven years.
``I don't think the Reserve Bank will do another two or three rate cuts after today,'' said Peter Pontikis, an economist at Suncorp-Metway Ltd. in Brisbane. ``That's crazy. Inflation is way too high. And they're cutting six months after their last hike, which is a little bit too soon.''
Stevens has signaled that one reason for lowering borrowing costs is to unwind the impact of higher mortgage rates on households.
Mortgage Repayments
The nation's five largest lenders, including Commonwealth Bank of Australia Ltd., have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has raised its benchmark by a total of 50 basis points in that time.
The increases added A$250 ($213) to monthly repayments on an average A$250,000 home loan, according to the Real Estate Institute. A report yesterday showed households spent 39.8 percent of their incomes on mortgage payments in the June quarter, the most in the 22 years the institute has measured affordability.
``The Reserve Bank has overshot the mark with interest rates,'' Michael Costa, treasurer of New South Wales state, told Sydney's Daily Telegraph last week. ``There is no doubt that monetary policy, interest rate rises, has hurt the New South Wales economy,'' Australia's biggest, he said.
Higher borrowing costs are forcing consumers to cut spending. Retail sales fell by the most in six years in June, eroding sales growth at companies including Harvey Norman Holdings Ltd., Australia's largest furniture and electronics retailer.
``If rates drop by between a quarter and half a percentage point in the next few months, it will help us, but it won't take us back to where we were last year,'' Chairman Gerry Harvey said in an interview on Aug. 29.
Investors expect Stevens will cut the benchmark borrowing cost by at least one percentage point in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps.
Sept. 2 (Bloomberg) -- Australia's central bank will probably cut its benchmark interest rate for the first time in seven years and may signal further reductions in coming months as the nation's 17-year economic expansion slows.
Governor Glenn Stevens will lower the overnight cash rate target by a quarter point to 7 percent today, according to 22 of 23 economists surveyed by Bloomberg News. The decision will be announced at 2:30 p.m. in Sydney.
The biggest slump in retail sales in six years, tumbling business confidence and evidence of slower jobs growth prompted Stevens to say last month that he may soon cut rates to avoid a ``deeper and more persistent'' economic slowdown. Gross domestic product expanded by the least in two years in the June quarter, economists surveyed ahead of a Sept. 3 report forecast.
``The Reserve Bank looks set to cut by a quarter point, and will probably cut again in October,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``The central bank has overseen a rise in interest rates to levels that have killed the inclination to expand for many households and businesses.''
The bank has added 300 basis points to the benchmark rate since December 2001, when it was 4.25 percent.
Policy makers last raised borrowing costs in March, for a second straight month, to curb consumer prices that jumped 4.5 percent in the second quarter. Stevens aims to keep annual inflation between 2 percent and 3 percent on average.
Economic Growth
Since the bank's last meeting on Aug. 5, reports have shown new home sales fell to a two-year low and lending to consumers and businesses rose at the slowest annual pace since 2002. Companies including Qantas Airways Ltd., Ford Motor Co. and Starbucks Corp. have announced job cuts.
The government will publish a report tomorrow at 11:30 a.m. in Sydney showing second-quarter gross domestic product rose 0.4 percent from the previous three months, when it expanded 0.6 percent, according to the median estimate of 23 economists surveyed by Bloomberg.
``We expect a relatively guarded statement from the Reserve Bank that recognizes the slowdown in growth, and the still persistent concerns about inflation and the present stimulus from commodity prices,'' said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney.
Stevens, along with his counterparts in Europe, Asia and the U.S., faces the challenge of balancing slowing household spending, which accounts for about 60 percent of Australia's $1 trillion economy, with the threat that inflation will accelerate amid rising energy costs and a shortage of skilled labor.
Exports to China
``The scarcity of labor in Australia is now acute'' and it will ``have a negative impact on BHP Billiton Ltd.,'' Don Argus, chairman of the world's biggest mining company, said at a business forum in Canberra yesterday.
Surging demand from China will increase Australia's export income by 20 percent this year, the central bank estimates, offsetting slower domestic growth and boosting profits at miners including BHP Billiton. A report showed yesterday that company profits surged in the second quarter by the most in more than seven years.
``I don't think the Reserve Bank will do another two or three rate cuts after today,'' said Peter Pontikis, an economist at Suncorp-Metway Ltd. in Brisbane. ``That's crazy. Inflation is way too high. And they're cutting six months after their last hike, which is a little bit too soon.''
Stevens has signaled that one reason for lowering borrowing costs is to unwind the impact of higher mortgage rates on households.
Mortgage Repayments
The nation's five largest lenders, including Commonwealth Bank of Australia Ltd., have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has raised its benchmark by a total of 50 basis points in that time.
The increases added A$250 ($213) to monthly repayments on an average A$250,000 home loan, according to the Real Estate Institute. A report yesterday showed households spent 39.8 percent of their incomes on mortgage payments in the June quarter, the most in the 22 years the institute has measured affordability.
``The Reserve Bank has overshot the mark with interest rates,'' Michael Costa, treasurer of New South Wales state, told Sydney's Daily Telegraph last week. ``There is no doubt that monetary policy, interest rate rises, has hurt the New South Wales economy,'' Australia's biggest, he said.
Higher borrowing costs are forcing consumers to cut spending. Retail sales fell by the most in six years in June, eroding sales growth at companies including Harvey Norman Holdings Ltd., Australia's largest furniture and electronics retailer.
``If rates drop by between a quarter and half a percentage point in the next few months, it will help us, but it won't take us back to where we were last year,'' Chairman Gerry Harvey said in an interview on Aug. 29.
Investors expect Stevens will cut the benchmark borrowing cost by at least one percentage point in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps.
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