Back off, oil, back off

Investor confidence swung between the extremes over the week but seemed to consolidate as earnings season approaches. The financial markets strengthened late last week on low volumes as the US Federal Reserve took a softer stand than expected on short term interest rates.

US equities recorded their biggest gain in over three years after the Fed raised interest rates for the 17th successive time but suggested a pause in further hikes. The statement added that the Fed will allow the past 17 rate hikes time to work into the system.

As discussed in our article last week, the central banks have in every case over shot the tightening cycle, raising rates too far. Important news for us this week has to be energy pricing. US light sweet crude is near US$ 74.00 a barrel and didn’t really get mentioned in the news at all. We find that good and indicative of acceptance that oil price is now where it will be for a while.

The one factor that stays real close to home is gasoline prices which have raised twice from the year 2000 and up 50% in the last two years. We had forecast that people would just move on once the initial pain was over and so said, so done. Oil price is high and gas prices high and no discussion in the business news.

UNITED STATES

The US Fed increased the funds rate by one quarter of a percentage point to 5.25% one week ago. As mentioned above, US equities rallied on the news from their policy statement that said US growth was showing signs of moderating, signaling the cycle of rate tightening could be nearing an end.

In economic news, the Conference Board’ Consumer Confidence Index increased to 105.7 in June from a revised May reading of 104.7.

This reflects a slight improvement in the consumers’ expectations from the bleak outlook in May. And in housing statistics, sales of existing houses dipped by 1.2% in May to an annual rate of 6.67 million and the supply of homes increased to 5.5 million or the equivalent of 6.5 months of inventory. The Department of Commerce reported that new home sales rose by 4.6% during May due to several incentives offered by builders to reduce their stock piles.

The US Department of Commerce revised the GDP growth rate upwards 0.3% for the first quarter of 2006. The new figure stands at 5.6%, up from the 5.3% stated earlier. This GDP growth rate is the fastest pace experienced in the US over the last two years and once again was fundamentally driven by consumer spending. The US Department of Commerce also revealed that the disposable income increased by 0.3% while consumer spending rose 0.4% in May, a somewhat slower rate that usual.

On debt instruments, US Treasuries climbed higher after the US Fed rate hike. The yield on the benchmark 10-year Treasuries retreated to 5.15% after it touched a four-year high of 5.25% on Wednesday.

UNITED KINGDOM

London equities rose sharply on the US Fed’s softened stance on interest rates, with the FTSE 100 enjoyed its biggest weekly gain in nearly eight months. Mining stocks, including Vendanta Resources, Kazakhmys and Xstrata, led the rise.

As in the US, a revised GDP figure for the UK economy showed it grew by 0.7% in the first quarter of 2006, taking the level of GDP 2.3% higher than the first quarter of 2005. The upward revision was mainly due to higher estimates of business services output, according to the Office for National Statistics.

Mortgage lending crossed the ? 1 trillion threshold, rising by ? 9.3 billion in May, its highest level in two and a half years, according to data released by the BoE. The number of loans approved for house purchases rose by 11,000 in May to 117,000. The British Bankers’ Association also reported a rise of 16,000 in the number of new mortgages in May. House prices edged up by 0.3% in June, from 0.2% in May, according to a monthly survey from Nationwide, the UK’ biggest building society. The average price of a house is now ? 165,730.00 which is around ? 8000 more than this time last year.

Inward foreign direct investment was at a record ? 91 billion in 2005, driven by the boom in take-overs of UK companies, according to the Organization for Economic Co-operation and Development (OECD). The UK was the largest investment recipient and the third biggest outward investor last year.

LOOKING AHEAD

We still see inflation pressures but are pleased to see both economic data and central bank comments that recognize the need to promote economic growth whilst controlling inflation. With earnings season upon us, but recognizing the draw to the World Cup and the summer months, we see a near- term strengthening as the financial markets turn in their 12th consecutive double digit growth quarter.

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