Fundmastery Blog

Kurt Brouwer October 31st, 2007

The Federal Reserve acted today to cut short-term interest rates again. That move was the catalyst for a rally in the stock market as this piece reports [emphasis added]:

Feds Lower Funds Rate By Quarter Percent (National Public Radio - npr.org -, October 31, 2020,

‘ The Federal Reserve Board lowered the cost of borrowing Wednesday with a quarter-point drop in rates in hopes of energizing an economy troubled by a sagging housing market and soaring oil prices.

The new federal funds rate of 4.5 percent makes it cheaper for consumers and businesses to borrow money.

It is the second reduction this year in the federal funds rate — charged on overnight loans between banks — and was widely expected.

In September, the Fed slashed the federal funds rate by a half-percentage point to 4.75 percent in hopes of boosting the ailing housing market and buoying the overall economy…’

This move was widely expected, but that does not mean it was unimportant. In fact, had the Fed not cut interest rates, the lack of action would have been viewed as negative by the financial markets. This article spells out what happened:

Anything But Spooked, Stocks Rally (MarketWatch, October 31, 2020, Kate Gibson)

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Kurt Brouwer October 31st, 2007

Now, that is good news. Despite all the problems with subprime lending, the housing slowdown and sharply-higher oil prices, the economy grew at a real (adjusted for inflation) rate of 3.9% for the third quarter of 2007. In this piece, we see some detailed information on how the economy grew despite all the obvious problems [emphasis added]:

GDP Grew 3.9% in Third Quarter On Exports, Consumer Spending (The Wall Street Journal, October 31, 2020, Jeff Bater)

‘The U.S. economy sped up last summer despite a much heavier drag from the housing sector thanks to as surging exports and stronger consumer spending.

Gross domestic product rose at a seasonally adjusted 3.9% annual rate in the third quarter, the Commerce Department said Wednesday in its first estimate of growth for the July-September period. GDP climbed at a 3.8% pace in the second quarter and 0.6% in the first…’

‘…Stronger exports helped power the economy through the housing slump and tighter credit conditions. Wall Street expected a solid but smaller GDP growth rate. The median estimate of 24 economists surveyed by Dow Jones Newswires was 3.2% GDP growth during summer.

The 3.9% increase represented the strongest growth in quarterly GDP since a 4.8% increase during the first quarter of 2006.

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Kurt Brouwer October 30th, 2007

Update:  Please feel free to take a look at this post. Here are more recent posts on real estate and the Case Schiller real estate index:

Case-Shiller Index — Chart of the Day

 

Los Angeles Real Estate Bubble vs. National Bubble — Chart of the Day

 

Home Prices Still Falling — Chart of the Day

Original Post:

We previously reported on slumping prices for homes in Major Turning Point?-Robert Shiller and Housing Prices Fall 3.2% Now, there is an interesting post from Justin Fox at Time’s Curious Capitalist Blog. He put together a report on the current status of home prices in major metropolitan areas. The report is based on the findings of the Case - Shiller Index [emphasis added]:

‘The headline number in the S&P/Case-Shiller Home Price Indices released this morning was that U.S. home prices dropped 4.4% in the 12 months ending in August. But it’s in the metropolitan-area details that the Case-Shiller data gets really interesting. So with the help of Time.com graphics whiz Feilding Cage, I charted them:…’

Click to enlarge chart

Justin Fox goes on to discuss the varying results for different metropolitan and there is no discernible pattern here as far as I can tell:

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Tags: Case-Schiller Index, real estate, Schiller, Time

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Kurt Brouwer October 29th, 2007

The change in oil prices this year has been stunning. Oil began the year at roughly $54 per barrel and now has surged above $93. That’s a 72% plus increase in 10 months.

Oil Tops $93 A Barrel as Mexico Shuts Production (MarketWatch, October 29, 2020, Morning Zhou & Steve Goldstein)

‘Crude-oil futures rose past $93 a barrel for the first time on Monday, after bad weather forced a halt to production in Mexico and the dollar touched the lowest level against the euro in more than eight years.

Crude futures for December delivery rose for a fourth day and closed at a new record high of $93.53 a barrel on New York Mercantile Exchange. Earlier it reached an intraday high of $93.8 a barrel.

Mexico’s state-owned Petroleos Mexicanos, one of the largest crude suppliers to the U.S., halted production of 600,000 barrels a day due to inclement weather on Sunday.

Petroleos Mexicanos, also known as Pemex, said it hopes to resume production in days.Mexico is U.S.’s second largest crude supply country after Canada, shipping 1.66 million barrels a day in the first eight months, according to the Energy Department.

Pemex is Mexico’s largest company with annual revenue of nearly $100 billion. It’s also the third largest producer of crude oil in the world, according to the company’s Web site.

“The Pemex shutdown is only putting a further floor under the already surging oil price, weakening dollar concerns are also pushing crude higher,” said Kevin Kerr, president of Kerrtrade.com and editor of Dow Jones MarketWatch’s Global Resources Trader…’

The dramatic price change for oil this year has been perplexing. Certainly, we can point to instability in the Mideast as well as in oil patch countries such as Nigeria and Venezuela. Also, the dollar has been weak and that plays a role. Plus, developing countries such as China and India are booming and using more oil than they used to use. All of these factors are significant, yet they do not readily justify a 72% spike in oil prices.

In the following article [emphasis added], the finance chief for Royal Dutch Shell points out how hard it is to justify the price surge: Continue Reading »

Tags: $93, MarketWatch, oil, Royal Dutch Shell

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Kurt Brouwer October 29th, 2007

For our latest thinking on the dollar see:

How Far Has the Dollar Fallen? And Why? — What’s Next?

This article [emphasis added] from the Wall Street Journal has it exactly correct as to why the dollar is falling against the Euro:

Rate-Cut Expectations Weigh on the Dollar (The Wall Street Journal, October 29, 2020, Dan Molinski)

The euro is stronger against the dollar early Monday in New York after hitting a fresh all-time high during the overnight session on expectations that the Federal Reserve will lower interest rates this week.

And sterling is trading at a three-month high against the greenback after consumer lending in the U.K. rebounded to the highest level in almost a year in September, suggesting its economy is weathering recent global credit problems.

Analysts said the dollar may continue to trade near its all-time low versus the euro as markets gear up for the interest rate decision Wednesday by the Federal Open Market Committee. The central bankers are expected to reduce rates to 4.50% from the current 4.75%, while some say it’s possible the rate could be cut to 4.25%.

Lower rates by the Fed tend to hurt the greenback by lowering its appeal to investors looking for higher returns.

“The dollar is likely to remain under pressure ahead of the FOMC decision,” said Sophia Hardy, currency strategist at UBS in New York.

The answer is interest rates. When our rates were high back in 2001, the dollar was at an all-time high versus the Euro. As our rates have fallen, the dollar has also weakened versus the Euro. For a much more in-depth treatment of this issue, see our post How Far Has The Dollar Fallen? And Why?

Tags: dollar, euro, interest rates, low, Wall Street Journal

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