US Interest Rates and Lending
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Consumer confidence in the States continues to show alarming weakness as yesterday’s number came in at just 62.3. Of course this index has some quite strange component parts as it is heavily weighted by the ‘perception’ of woe or joy rather than their actuality. If all you hear on TV or read in the newspapers is dire news of this or that it is quite difficult to state that you, personally, are ‘confident’ in your outlook. It is this ‘talking into a recession’ by the forth estate that annoys retailers and industry leaders and which is difficult for journalists to defend against. Their job is to report news…. There is a story in disaster but none at all in slow steady growth.
Today could see a very quiet trading session as the markets await this evenings’ FOMC rate decision. Commentators appear to be in two minds but with the consensus falling towards a quarter point cut to 2% (3pc below the UK). I am not sure that the current woes in the US economy can be easily solved with further interest rate cuts as you have the feeling that if you cannot afford a loan at 2.25% what makes you think that 2% will be any better and there is always the other side of the equation...that of the lender. I might lend at 5-6%, as this might be a reasonable return for my risk (especially in a slowing economy). BUT am I going to do so for a measly 2%. Banks must get their tier one, two and three capital from somewhere and at the moment it is costing them dear. Remember Citigroup’s 11% shell out a few months ago. RBS and HBOS are having to deeply discount their rights issues etc.
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This is always the balancing act that must be measured by the central banks…at what point are you increasing the survival chances of existing business (low rates) whilst at the same encouraging lenders to lend (high rates).
Before the FOMC we actually have a couple of other quite important pieces of data from across the pond. The advance GDP number the ADP employment report and the Chicago NAPM survey. So it will not be for lack of data that the markets trade into today’s session.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'US Interest Rates and Lending' edited by SD, updated 30-Apr-08
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