Wall Street was range bound ahead of
the FOMC policy meeting, with little other economic data due for
release. The commerce department announced a surprise 4.6% increase in
new home sales, but confirmed that the data is subjected to statistical
errors (no surprise there). This weeks MBA US mortgage applications fell
to a 4 year low which should not surprise anyone as the 30 year mortgage
rate is now at 6.78%, a four year high. A sharp relief rally for stocks
were seen as the Fed raised rates by 0.25% to 5.25%, the 17th
consecutive rise and at the highest level in 5 years. The Dow ended the
week 1.5% higher whilst the S&P 500 and the Nasdaq Composite jumped by
2.1% and 2.4% respectively.
Euro Zone data released was all about confidence as German business
confidence for June came in at a 15 year high whilst consumer confidence
for May was at a 5 year high, no doubt buoyed by the country’s improved
unemployment rate at 10.9%. French business confidence eased slightly in
June, but its consumer confidence level rose as unemployment fell to a
3.5 year low at 9.1%. Euro zone money supply expanded at an 8.9% year on
year pace in May, a 3 year high and German Producer Prices were at their
highest pace in 24 years, placing pressure on the ECB to raise interest
rates. Finally, UK consumer confidence rose in May apparently due to the
forthcoming World Cup, so that will have been dented by Saturday’s exit
of England by the Portuguese Men of War. The main European bourses
followed Wall Street’s lead with the FTSE 100 index higher by 2.5%. The
French CAC 40 and German Dax indices gained 3.1% and 2.8% respectively.
Out East, the research department of China’s Central Bank announced that
China’s GDP is on course for a 10%+ growth rate in 2006. Meanwhile,
Japan’s retail sales rose in May, as did consumer prices, which
increased at the fastest pace in 8 years. Japan’s unemployment rate also
fell to an 8 year low at 4%.
The $US index, sank by 2% post FOMC decision as investors interpreted
Benanke Speak as a possible pause in further rate hikes after the August
meeting. Likewise with Treasury yields which fell by 2.1% and 1.7%
respectively for the 5 and 10 year Treasury notes.
Commodity prices finished the week on the up, again believing that the
Fed is near done in tightening, thereby taking the brakes off the
economy. The $Oil price jumped by 4.1% to $73.8 a barrel, assisted by a
recent plunge in US inventories, whilst the $Gold price soared by 5.5%
towards weeks end, ending it at $615 oz.
So there we have it. The FOMC hinted that future US rate rises will not
be ‘automatic’ but will happen only and when warranted by economic
circumstances. Meanwhile, in a press release at the conclusion of its
annual meeting last week, the BIS (the Central Bankers, Central Bank)
warned that CB’s will have to move faster to raise interest rates
because global inflationary pressures rising, with the economy remaining
vulnerable. In plain English that says “The Fed may stop raising rates,
but the rest of the World wont”.
“Thinking
men cannot be ruled”
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