Today sees a meeting by the Federal Open Markets Committee which is eagerly anticipated as it may signal a change in US monetary policy. This will be something of a sea change should it take place because if you look back to the beginning of this year the Fed was making plans for a reduction in stimulus measures rather than an increase. In some ways the change is quite an eloquent summary of the turn in the US economy although I still feel that a policy response would be premature as the evidence so far is of a slackening in growth only. One somewhat ironic consequence of the change is that the Fed is presently trialing moves to reduce its monetary stimulus just at the moment there is speculation it will in increase it!
Another factor which has been concerning markets has been concerns about commodity prices which were highlighted by the surge in wheat prices last week. In terms of the overall effect the Commodity Research Board’s spot index drifted slightly lower yesterday to 444.93 with foodstuffs falling but metals rising. As to wheat itself it is edging back up towards US $7.50 per bushel this morning.
Bank of Japan’s meeting
The Bank of Japan has also had a policy meeting which has attracted less publicity than the Fed’s. In the event it decided at the end of its two-day policy board meeting that it will keep the overnight call rate at 0.1%. The rate hasn’t changed since December 2008. The last actual policy move by the Bank of Japan was in March when it doubled a fixed-rate credit program for banks to 20 trillion yen ($233 billion). Part of the reason for not acting was probably that it had only a month ago raised its forecast for Japan’s economic growth for the year through March 2011 to 2.6% from 1.8%. At the time it said that the main reasons for this were improved demand for exports from the U.S. and developing nations like China. Also as one of Japan’s main problems at the moment is external being the current high level of the Yen at 85.75 versus the US dollar which makes like harder for Japan’s exporters it is also probably true that the Bank of Japan is waiting to see what will happen at the FOMC meeting.
In some ways the Bank of Japan is caught between a rock and a hard place. Over the lost decade it has tried various policy measures none of which have decisively moved Japan out of a deflationary and indeed disinflationary gridlock. It has tied its own hands a little by raising its growth forecast just as economic news turned downwards as for example the unemployment rate has risen to 5.3% in the last data set and industrial production has fallen back from 96.1 to 94.7 on a seasonally adjusted basis. This morning also saw some new data on Japan’s current account surplus for June which was 1.047 trillion Yen (US $12.3 billion). This was not only lower than expected but was also some 18% lower than last June’s adding to the disappointment was the factor that Japanese export growth has also slowed. Now I always caution placing too much emphasis on one months trade figures because they are simply not accurate enough but even so these figures will give Japan’s policymakers some food for thought as the recent rise in the Yen’s exchange rate is probably too recent to have affected these figures and so its impact has yet to come.
There are two main themes that the Bank of Japan’s inaction leaves me with. The first applies elsewhere today as it has tried Quantitative Easing and asset purchases several times and yet still finds itself in the economic mire, policymakers on the other side of the Pacific will do well in my view to take note of that later on today. The second is that the lost decade has highlighted the limitations of monetary policy and the powers of central banks as the Bank of Japan has used most if not all of the policy measures available to it without finding a full solution to Japan’s problems. As central banks are being relied on to influence quite a few economies at the moment this is a particularly sobering thought in my view.
Housing Markets in the UK and US
The Royal Institute for Chartered Surveyors has reported this morning that it had detected signs of a downturn in house prices. In its survey of 242 surveyors it found that 25% had seen falls but only 11% reported house price rises. This added to recent surveys that had indicated something similar. Foreign readers may not be aware of the amount of time spent in the media discussing house prices in the UK . Partly this is due to the relatively high rate of owner-occupation in the UK but it is also true that it is something of a national obsession! I have a London radio station on in the background and their response to this (and a curious report about fuel prices I will discuss later) is “are we falling back into recession?” So nice, balanced and temperate as you can see!
Be that as it may house prices are a bellweather for the UK economy and as so much of the moves to benefit the UK economy should have benefitted it then any sustained downturn will have implications for the wider economy. For example variable mortgage rates fell substantially as official interest rates were slashed in response to the crisis and the Bank of England has done its best to support the banks with its various programmes which include not only QE but also its Special Liquidity Support operation. I guess this is an example of watch this space.
US Housing Market
Here the news had a similar implication but it came from another route. The two state supported mortgage lenders Freddie Mac and Fannie Mae have tottered on since they were bailed out by the US government back in 2008. So far the financial support provided by the US government has come to US $148.3 billion. Anyway Freddie Mac has just asked for some more money and yesterday requested an additional $1.8billion from the US government, as underperforming home loans continued to saddle it with losses. It said it lost some US $6 billion in the second quarter of this year. Whilst this is an improvement on the first quarter it is much worse than the same period last year when it lost a comparatively small US $840 million.
So one is left with the opinion that the US housing market is still struggling and if you were in any doubt here is a quote from the chief executive of Freddie Mac which I found a little chilling.
Freddie Mac “continues to support the still-fragile housing market by providing America’s families with access to affordable home financing and foreclosure alternatives.”
As well as the fact that plainly from these figures and the quote above America’s housing market continues to struggle there are some other Interesting features. Firstly those who believe in proper accurate accounting will be concerned to see that neither company is included in the US government budget even though they were taken over by the government in 2008 and their losses since then are the responsibility of US taxpayers. Secondly as plainly they are still struggling any further reversal in the US housing market would hit them hard. Thirdly they are financing more than 90 per cent of the home loans issued at the moment in the US such is the disarray in the US private-sector mortgage market.
Continuing the theme of trying to reduce crisis measures just as other problems may be surfacing Freddie Mac is also making a dividend payment of US $1.3 billion to the US Treasury.
UK Petrol and Diesel Prices
I notice that the UK news media has been running a report saying that UK fuel prices will rise by around 8% by the end of the year. I took a look at the reasons for this report and found it rather odd. The first suggested component of rising crude oil prices is true as they have risen by around ten per cent recently but the second component a fall in the UK exchange rate has simply not happened. In fact the reverse has happened against the US dollar which is the currency oil prices are measured in. Our recent low was at US $1.4305 on the 20th May and we are now around US $1.58 which is a rise of around ten per cent. So we in fact have offsetting moves not complimentary ones.
The RMI Independent Petrol Retailers Association has a vested interest in representing its members but the press should check the claims before giving them publicity. Between now and January 2011 many things may happen but as we stand right now there is no real basis for forecasting price rises except from the increases in fuel duty and then VAT which the government has announced. In my locality I notice that fuel prices have edged up this week so it would appear that petrol retailers are giving price rises a go well before either of these actually happen.