Federal Reserve Policymakers Will Hold Line on Interest Rates...
William Patalon III, August 11th, 2008
Federal Reserve Policymakers Will Hold the Line on Interest Rates - At Least for Now
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
With oil trading near a three-month low (and corn now at a four-month low), U.S. Federal Reserve policymakers may have just the ammunition they need to hold the line on interest rates for the foreseeable future - or at least until their Sept. 16 policymaking meeting.
On the other hand, threats of hurricanes in the Gulf of Mexico and geopolitical turmoil in Iraq, Turkey, Nigeria - and now the fireworks between Russia and Georgia - could spark a dramatic reversal in sentiment and renew fears of supply disruptions.
However, this week’s economic calendar contains the types of reports that will factor into the musings of Federal Reserve policymakers with regards to interest rates.
The report on the Consumer Price Index (CPI) for July - due out Thursday - gives economists another look into domestic price pressures, although the recent drop in energy prices will not yet be reflected in this data. Then again, economists tend to focus only on so-called "core" inflation (which "excludes volatile food-and-energy prices," anyway).
The July retail sales report gives us some additional insight into the consumer mindset, demonstrating that those tax rebates are virtually all gone. With gas prices on the decline, consumers should have a bit more available disposable income in the months ahead (though, again, the July numbers may not show any enhanced activity just yet).
Additional confirmation of the recent consumer cautiousness should come from the next round of earnings reports, which will feature reports from such retailers as Macy’s Inc. (M), J.C. Penney Co. Inc. (JCP), Nordstrom Inc. (JWN), and Wal-Mart Stores Inc. (WMT). Should the gas trend continue, consumers could emerge from hibernation just in time for the holiday shopping season… wishful thinking?
Market Matters
Let the games begin. As host of the 2008 Summer Olympic Games, Mainland China takes center stage and gets the chance to show the rest of the world that it has arrived as a global player and an economic superpower. Of course, no event should be more apolitical than the Olympics. That is, until China banned some participants for their support of Darfur. And before U.S. President George W. Bush criticized China’s poor record of human rights on the eve of the games. And before China deported a few activists who were demonstrating against certain national policies. (Probably nothing that a few gold medals won’t cure.)
Sign up below…
and we’ll send you a new investment report for free:
“The Three Best Investments in Asia.”
Speaking of having politics cross over into the economy: Last week, Democratic presidential candidate Barack Obama publicly lobbied for the sale of 70 million barrels of oil from the U.S. strategic reserve and also claimed to now support new offshore drilling (if his tire gauge idea fails to prove an effective policy). As the presidential-election campaigns accelerate into the home stretch, investors can expect plenty of promises (and flip-flopping) from both sides of the aisle. (How do you feel about those Bush tax cuts this week, Senator McCain?)
So just where are investors to turn these days? Freddie Mac (FRE) and Fannie Mae (FNM) returned to the headlines last week, as both reported significant losses - far in excess of Wall Street expectations. (Weren’t those analysts following the news?) Likewise, insurance giant American International Group Inc. (AIG) reported its third consecutive quarterly loss as its mortgage portfolio remained deeply under water. Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and UBS AG (UBS) each reached multi-billion settlements with the New York state attorney general over certain high-risk securities that the firms will buy back from affected investors. Outside of financials, Cisco Systems Inc. (CSCO) - the subject of a recent "Buy, Sell or Hold" feature in Money Morning - provided a boost to techs by announcing better-than-expected profits; likewise, The Procter & Gamble Co. (PG) proved that consumer companies could still thrive, despite surging commodity prices.
Institutional funds have garnered additional interest as of late as investors seek out non-traditional asset classes to help compensate for the challenges of the markets. In July, Hedge Fund Research Inc. reported that the return on a basket of 60 funds designed to reflect the industry as a whole declined by about 3%, the worst monthly showing in six years. Tutor Investment Corp. will be spinning off its Raptor fund at year-end after bad calls on the energy sector caused ongoing losses for the past two years. Private equity firm, Fortress Investment Group LLC (FIG), reported a larger-than-expected quarterly loss and has seen its share price drop about 40% since its IPO in early 2007. Bear in mind, not all hedge funds and non-traditional assets are created equal; plenty of "winners" have emerged lately.
Anyone remember when oil touched $147 a barrel on July 11? Has the bubble officially burst? Energy continued its downward spiral as oil fell below $117 barrel, its lowest level since early May. Rising inventories eased supply/demand concerns and renewed strength in the dollar also helped support domestic securities (thanks to the European Central Bank - see below). Equity market volatility remained as investors tried to weigh the negative Freddie/Fannie reports against the positive energy trend (and the inactivity of Federal Reserve policymakers with regards to interest rates - also see below). Stocks alternatively soared, plunged, and soared again as the major indexes moved considerably higher by end of last week.
Then there are the ongoing Beijing Summer Olympic Games (which opened Friday), a reminder that every investor should have a China investment strategy [Editor’s Note: Please click here to read the first part of our two-part research report -"Why Every Investor Should Have a China Investment Strategy." The second part of that report will appear later this week.]
Perhaps that jubilant Olympic spirit is contagious? So let the games continue: "USA…USA…USA…!"
William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editor for The Money Map Report. Before he moved into the investment-research business in December 2005, Patalon spent 22 years as a journalist, most of it covering financial news as a reporter, columnist, and editor that included stints with Gannett Co. Inc., and The Baltimore Sun.
Patalon has covered finance and investing, economics, manufacturing, the defense sector, biotechnology, and telecommunications. The companies he’s covered include Eastman Kodak, Xerox, Harley-Davidson, Caterpillar, Westinghouse Electric, Verizon, MedImmune, and Black & Decker.
Patalon’s work has appeared in Kiplinger’s personal finance magazine, USA Today, and The South China Morning Post, among other publications. A winner of approximately two-dozen journalism awards – including top honors from The Associated Press and the prestigious Society of American Business Editors and Writers (SABEW). Patalon is also the co-author of the Prentice Hall book, Contrarian Investing: How to Buy and Sell When Others Won’t and Make Money Doing it. Before taking over as managing editor of Money Morning, he served as the editor of The Rebound Report, an investment newsletter focusing on turnaround stocks.
Patalon has a BA in Print Journalism from Penn State University, and an MBA in finance from the Rochester Institute of Technology. He lives near Baltimore.
