Global weekly themes: Paradigm shift in US interest rate outlook

Monday 7th December 2009

Friday’s US jobs report has turned the interest rate cart upside down. American companies shed 11,000 jobs in November, according to the US Labor Department, far fewer than the 100,000 to 125,000 forecast by economists.

In addition, the unemployment rate declined to 10% from 10.2%.

While the latest labour news bodes well for investors betting on a recovery in the world’s biggest economy, the prospect of a return to a more normal jobs front could prompt a rethink of monetary policy by the Federal Reserve.

The Fed has flooded the US financial system with money during the past year to bolster lending in the wake of the credit crisis which claimed Lehman Brothers and led to the US government becoming a reluctant shareholder in several of the country’s biggest banks.

Fed Chairman Ben Bernanke has consistently said interest rates would remain low for an extended period, a refrain repeated so frequently in the last few months that most Wall Street analysts have forecast no change in rates through 2010.

Analysts may now need to reassess what lies ahead. Bernanke and other regional Fed bank presidents have pinned a decision on increasing rates on the labour market, and November’s report may be the trigger, albeit more evidence may be needed before any actual rate decision is made.

Investors will be keen to hear Bernanke’s take on the jobs numbers when he speaks at the Economic Club of Washington at noon on Monday, looking for any signs of a change in tone.

Federal-funds futures contracts on the Chicago Board of Trade show an 18% probability that the central bank will lift its target rate for overnight bank borrowing to at least 0.5% by March, up from 13.1% odds Thursday, Bloomberg News reported. For a similar increase at the June meeting of the Federal Open Market Committee, the probability rose to 52.9% on Friday from 43% the previous day.

On Wall Street on Friday, the Dow Jones Industrial Average rose 0.2% to 10,388.90. The Standard & Poor’s 500 increased 0.6% to 1105.98 and the Nasdaq gained 0.98% to 2194.35.

Among the biggest advancers were 3M Co, Bank of America, Moody’s Corp, Intel, Big Lots Inc and Marvell Technology Group.

Volume was above average on the New York Stock Exchange, with 1.57 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.32 billion shares traded, above last year's daily average of 2.28 billion, according to Reuters.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of seven to three, while on the Nasdaq, about 10 stocks rose for every three that fell.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s “fear gauge” was unchanged at 24.51.

Shares in Europe ended their session Friday on a positive note, taking their cue from the US jobs report. The benchmark Stoxx 600 added 1.1% to 249.03. It rose 2.7% for the week, bolstered by reports pointing to signs of renewed manufacturing activity in Europe and China.

On Friday, the FTSE 100 ended 0.18% higher, the DAX lifted 0.82% and France’s CAC posted a 1.25% rise. The focus this week will be on US retail sales set to be released on Friday.

There have been mixed reports since the start of the holiday shopping season began in late November. Retail sales are expected to have risen 0.6% last month, according to analysts surveyed by Reuters. Also on Friday is an initial reading on consumer sentiment. The Reuters/University of Michigan Surveys of Consumers index is expected to rise to 68.5 in December from 67.4 in November.

For bond investors, the US Treasury will auction US$40 billion of 3-year notes on December 8, US$21 billion of 10-year notes on December 9 and US$13 billion of 30-year bonds on December 10. The US will also sell US$30 billion in three-month bills and US$31 billion in six-month bills.

The US Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, rose 1.72% to 75.911 late in New York on Friday.

The prospect of higher US interest rates bodes well for the currency which has drifted lower and lower in recent months. The US dollar rose 4.7% against the yen last week. That’s the biggest advance in more than a decade, according to Bloomberg.

Businesswire.co.nz

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