Market Bets on Interest Rate Cuts

The confirmation of the weakness in the international stock market stunned investors and lifted expectations that the Federal Reserve would be forced to cut interest rates.
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The confirmation of the weakness in the international stock market stunned investors and lifted expectations that the Federal Reserve would be forced to cut interest rates. After last week’s miserable job scenario, the investors in treasury securities are very sure that the Federal Reserve is about to get on a sequence of federal funds rate cuts. They are particularly worried about the recent economic weakness that can be an attribute to the lack of business confidence more than weak-hearted consumers.

Experts believe that – It is not the consumer but the businesses that are frightened. It is clear that the consumer demand is holding up and helping the market to sustain the 2 percent of growth.

On the other hand, the loss of 4,000 jobs in the month of August, were the first drop in four years. This suggests that the Federal Reserve is behind the curve in lowering the rates. On this Mr. Peter Morici, a professor of business stream at the University of Maryland said. “There is fear out there. But we are probably going to see strong productivity because employers are unwilling to hire.”

The return on 10-year Treasury notes plunged 14 basis points on the last week to trade at 4.37 per cent, a level where it never reached since late 2006. The credit crunch stays, with the institutional investors totally unwilling to buy all types of securities and the sub prime mortgage market remains a tragedy.

An economist analyzed that the rate of seizing property due to unpaid mortgage dues or installments has rose to a record in the second quarter, and even the payback default rates for prime borrowers rose to the levels that have been not seen after the 2001 recession.

The standard three month London interbank offered rate (Libor) was about 5.72 per cent late last week. The increase of 36 basis points during the past few weeks is its highest level after early 2001.

Libor generally determine the short-term borrowing costs for many companies around the world, as well as interest rates on adjustable rate mortgages in the country. It is believed that the rise in the Libor rates has caused rates on adjustable rate mortgages, to point even as the usual long term mortgage give ups have fallen.

The higher Libor rates also makes it less expectable that the banks will borrow from each other. This is considered as a problem and it shows the tightening of the monetary policy.

In the interim, the waiting game is over to the next week’s Federal Reserve meeting. The main US economic data due this week include the trade shortage and the ABC news consumer confidence index today; The Mortgage Bankers Association’s mortgage applications date tomorrow; initial jobless claims on Thursday; import prices, retail sales, industrial production, capacity utilization, business inventories etc on Friday.

The Canadian data due this week include housing starts, the new house price index and the international merchandise traded surplus tomorrow, industrial capacity utilization on Thursday and manufacturing shipments and labor productivity on Friday.

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