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Markets News Friday: Fed hikes rate for lending to banks; Shares dip in Europe and Asia; Dollar up and oil price down
By Finfacts Team
Feb 19, 2010 - 8:43:42 AM
Germany's federal statistics office, Destatis, reported today that the index of producer prices for industrial products (domestic sales) for Germany fell by 3.4% in January 2010 from the corresponding month of the preceding year. In December and November 2009, the annual rates of change were –5.2% and –5.9%, respectively. Compared with the preceding month, the index rose by 0.8% in January 2010 (–0.1 % in December 2009).
The Federal Reserve on Thursday raised the discount rate charged to banks for direct loans by a quarter point to 0.75% and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.
“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the Fed said in a statement.“The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”
Ryan Sweet, Moody’s Economy.com commented: "The Federal Reserve Board’s hike in the discount rate Thursday signifies a separation between credit easing and traditional monetary policy. However, it does not alter our forecast for the central bank to leave both the interest paid on reserves and the fed funds rate target unchanged until the fourth quarter of 2010.
A higher discount rate makes sense, particularly since the Fed has closed many of its emergency lending facilities and demand for funding has slowed substantially. … The central bank is attempting to wean banks off government sources of liquidity. The Fed wants depository institutions to rely more on private funding markets and banks to shore up their capital the old fashioned way—by borrowing short and lending long. The recent widening of the yield curve, which reached a record earlier Thursday, should help in that regard."
Economic View; Fed takes first steps at getting back to normal: Goodbody economist, Deirdre Ryan, commented - - "The Federal Reserve last night took the first steps in reducing the extraordinary liquidity provisions in place by raising its discount window by 25bps to 75bps. It also restored the maximum maturity for primary credit loans to overnight (had been extended to 30 days), as well as raising the minimum bid rate for its final Term Auction Facility (to take place on March 8th) by 25bps to 50bps.
The moves, while slightly unexpected in their timing are not wholly surprising in light of the intensive discussion around unwinding some of the exceptional liquidity provision measures that took place at the last policy meeting, as revealed in the meeting minutes released earlier this week. Longer dated bond yields moved out slightly following the announcement (US 10 yr +7bps on the day) reflecting the relatively unsurprising nature of the changes. Nonetheless, they do represent the first in what will be a series of measures aimed at restoring liquidity provision to a more normalised state. Any increase in the fed funds rate still remains unlikely in the near term.
The statement accompanying the announcement was explicit in stating that the move does not signal any change in the economic or monetary policy outlook, while it also reiterates the Fed’s commitment to ‘exceptionally low levels’ of the fed funds rate for an extended period. The commitment to a continued low fed funds rate was further underlined by comments overnight from FOMC member Bullard, who indicated there is a greater probability of a fed funds rate rise in 2011 than in 2010. We have been of the view for some time that the Fed funds rate will remain at its current level of the whole of 2010. In any case, these moves highlight that unwinding some of the extraordinary measures put in place at the height of the financial crisis will take centre stage in the monetary policy debate in the near term.""
Multi billion dollar bond fund manager Pimco Co-CIO and Founder Bill Gross discusses the effect of the discount rate hike on the economy, with with Nariman Behravesh, IHS Global Insight chief economist; and CNBC's Tyler Mathisen, Maria Bartiromo & Steve Liesman:
Fed takes another step to normalise policy: Davy chief economist, Rossa White, commented - - "The Fed took another small step along the path to normalising monetary policy last night. In raising the spread of the arcane discount rate over the Fed funds (base) rate, it takes another comfort blanket away. The discount window for emergency loans has not been widely used recently, and its attractiveness will be diminished significantly when the maturity of the loans reverts to overnight from 90 days on March 18th. US bond yields did nudge up after the announcement, but this does not signal in any way that a Fed funds rate hike is imminent.
Before the crisis, the expensive discount window (or primary credit facility) was used mainly in emergency circumstances by banks looking to get overnight loans against eligible collateral from their regional Fed bank. When the inter-bank market seized up and banks ran into severe liquidity difficulties, the Fed cut the (penal) gap between the discount rate and the target for the overnight funds rate from 100 basis points (bp); eventually all the way down to 25bp. More importantly, it lengthened the term of the loans from overnight all the way out to 90 days. Use of the facility increased as a funding source for those banks with a lot of dodgy collateral (asset-backed securities) at the height of the crisis in late 2008/early 2009. But its usefulness has waned as private funding markets have gradually opened up since Q1 2009.
This does not signal that the Fed funds rate (which helps set interest rates all the way along the curve) will be pushed up from its 0-0.25% target in the next few months. It is simply the removal of another facility that is really no longer needed. The plan is to encourage banks to go back to relying on the private market primarily, even if they probably don't need any further push. Fed Chairman Bernanke will have a chance to explain the sequence of steps towards further normalisation in his testimony to Congress next week. But we still don't see the Fed hiking its key funds rate until well into H2."
Toyota: Akio Toyoda, Toyota’s embattled chief executive and grandson of the founder, has agreed to before a US congressional committee investigating the quality issues that have led to the huge vehicle recalls in recent weeks.
Seiji Maehara, Japan’s transport minister, welcomed Toyoda’s move but said he should have been quicker to accept the committee’s invitation. “This is a safety issue on which people’s lives depend, and it’s a manufacturer’s duty to respond firmly,” he said.“It’s a shame they flip-flopped, and there was talk that he wouldn’t appear.”
The Fed's removal of emergency measures is a way to assess if the recovery has staying power, says Dominique Dwor-Frecaut, macro strategist at Royal Bank of Scotland. She shares her outlook on the move, with CNBC's Chloe Cho and Anna Edwards:
US markets
On Thursday, the Dow rose 84 points or 0.81% to 10,393.
The S&P 500 advanced 0.66% and the Nasdaq rose 0.69%.
Asia
The MSCI Asia Pacific Index dropped 2.3% in reaction to he Fed's move on Thursday. The dollar touched a nine-month high against the euro
The Nikkei 225 dipped 2.05% and India's Bombay Stock Exchange Sensitive Index fell 1.42%.
Chinese markets were closed for the Lunar New Year holidays.
In Europe, the Dow Jones Stoxx 600 has dipped 0.91% Friday.
Nestlé, the world's biggest food company today posted a 42% drop in its 2009 net profit to CHF10.4 billion Swiss francs and expects stronger growth in the coming year.
The net profit, equivalent to €7.1 billion brought the group back to the 2007 level.
"For 2010, I expect our Food and Beverages business to achieve higher organic growth than in 2009," said chief executive Paul Bulcke.
More than a tenth of its sales come from bottled water, having bought San Pellegrino and Perrier in the 1990s. The bottled water revenue dropped 1.4%, excluding currencies, acquisitions and disposals, as consumers bought cheaper generic alternatives.
The volume of goods sold rose 1.9% in the year and revenue, excluding acquisitions, divestments and currency swings, rose 4.1%.
The ISEQ is dropped 0.88% in Dublin.
Elan has dipped 2.09% and CRH has dropped 1.58%.
US President Obama announced the creation of a bipartisan committee to tackle the public deficit he described as having a "disturbing" trajectory. Robert Shiller from Yale University considers Obama's strategy.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009.
On Monday, the index fell 5 points or 0.12% to 2,566; on Tuesday, the index rose 32 points or 1.3% to 2,598; on Wednesday, the BDI added 63 points or 2.4% to 2,661; on Thursday, the index rose 43 points or 1.6% to 2,704.
In the Financial Times on Wednesday, Feb 17th, Javier Blaswrote that the weakness in the Baltic Dry Index, long seen as an indicator of global economic activity, does not reflect a downturn in global trade. Instead, the measure of freight costs is showing a strong supply of new vessels that helps explain the 40% drop in three months. “New supply is astonishingly high and it is overwhelming the otherwise robust demand for bulk commodities from China,” he wrot. “On the other hand, bullish investors should be cautious of any near-term turnround. Rather than a sign of stronger economic activity and commodities demand, it is likely to reflect cancelled orders, scrappage and port congestion.”
Davy analyst, Emer Lang, comments: EU response to NAMA 'within weeks': RBS opts out - - "A report in the Irish Times suggests that European Commission approval for NAMA is likely 'within weeks'. With loans to the top-ten developers expected to be ready to transfer by the end of February, EU approval will pave the way for the process to begin.
With today marking the deadline for banks to apply for participation in NAMA, an article in the Financial Times says that RBS has decided not to enter Ulster Bank in the scheme. Ulster is already a substantial participant in the UK APS scheme. Details published by HM Treasury show that Ulster Bank has already moved a sizeable portfolio of troubled loans into the UK scheme, including £4.7bn residential mortgages, £0.8bn retail personal loans, £1.4bn business banking/SME loans, £7.6bn corporate loans and £13bn of real estate finance/commercial real estate loans – an aggregate of £27.5bn. The real estate piece consisted of 'approximately 10,000 loan facilities (predominantly term loans and overdrafts) to almost 4,000 borrowers and approximately 2,300 different real estate and property groups. Clients range from large corporate real estate clients to small provate residential property developers'. It reflected all loans in default at that time, all loans then under review by the Global Restructuring Group or on the watch list and also those that were considered by RBS to be at high risk of default.
EBS Building Society has become the fourth Irish institution to raise long-term funding under the new guarantee. It has issued a five-year state-guaranteed bond at a rate of 1.6% above the mid-swap. Reports put the cost of the guarantee at €35m, which is equivalent to 70bps per annum over the five-year period."
