US Fed Rate Cut: another 75 basis points?

Is US Federal Reserve Bank going for another rate cut? If the market speculations and the bond prices are any indications, then definitely YES.
There are strong indications in the market that the Fed may cut another 75 basis points in the interest rates, or 0.75%. The bond prices in the US are going down because of this speculation, and there are expectations that the Fed will definitely have to go for a massive rate cut.

This speculation about the interest rate cut follows from the recent development of dollar yen exchange rate falling to record bottoms for the dollar in the past many years.

Previously also, the Fed had gone for massive rate cuts, but the turmoil seems to continue for the US economy.

What is more dangerous for the other emerging economies of the world is that the export dependent countries like India and China also face the dangers of being eroded away. The interest rate differential between India and US is already well above 5% or 500 basis points, and yet another rate cut of 75 basis points will make it an interesting scenario.

As per the news, the U.S. Treasuries fell for a second day on growing speculation the Federal Reserve will lower interest rates by 0.75 percentage point this month.

Two-year notes led the declines, with the yield difference between the shortest-dated debt and 10-year notes at 190 basis points, still near the widest in more than 3 1/2 years. Traders raised bets on rate cuts on speculation policy makers are more concerned about reviving economic growth than curbing inflation.

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Northern Rock Shares Suspended from trading

Northern Rock shares have been suspended as the government looks to introduce a bill today enabling the bank to be brought into temporary public ownership.

The government official concerned with the issue said that the rescue packages or “offers” made by Virgin group and Northern Rock management group were considerable but not sufficient for delivering the value for the money. “Our financial adviser Goldman Sachs has concluded from a financial point of view that a temporary period of public ownership better meets our objective of protecting taxpayers,” a statement from the officials claimed. Hence the offer of Buying Northern Rock still remains open. Right now, it is Virgin Group which has emerged as the winning bidder.

Northern Rock has got a new boss – someone who is known as a “Corporate Troubleshooter”. Cambridge-educated Ron Sandler started his career as a management consultant. He joined Lloyd's of London in 1995, becoming chief executive a few months later.

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Interest Rate Cuts: US, UK and India

It seems to be an almost certainty, that there will be further rate cuts in US, UK and India. There are strong signals from Fed, Bank of England as well as Reserve Bank of India, that there may be interest rate cuts in the coming few weeks.

Yesterday, it was Ben Bernanke, The Fe Chairman, who set the outlook for the coming year, and clearly hinting that the Fed is very open to cut the rates further to help the struggling US economy recover from the so called fear of recession, which some experts believe is unavoidable. How bad the US economy is is clear from the measures taken by US government recently – offering a tax rebate, Warren Buffet making an offer to reinsure municipal bonds & Fed reveals plans to help mortgage defaulters - Just to name a few.

In UK, we have the same story. The Bank of England governor has already expressed deep concerns over the falling standards of living in UK due to substantial price rise in food and fuel costs. Reuters yesterday reported that there is a strong possibility of 2 more rate cuts by Bank of England to bring some clam to the struggling UK economy.

In the emerging markets, India’s Finance Minister and Reserve Bank of India Governor is giving strong signals for a rate cut. The expectations are that in March, there will be some relief from the growing interest rates. Though in a recent statement, the RBI governor had left the field open to the banks to battle it out and many banks in India have deducted their rates for house loan, car loan, etc.

But the latest signal is the fuels price hike by the Indian government. A rise of 4% in petrol (Rs. 2) is the strongest signal, that analysts believe, is sufficient enough to indicate the government is seriously considering a rate cut. Let’s see what goes on – expectations for rate cut are in March.

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UK Standard of living goes down: may deteriorate further

In one of the most blunt and blatant statements issued by the Governor of Bank of England (Equivalent to Fed in US or RBI in India), Mr. Mervyn King, has issued a formal warning to the UK citizens about the deteriorating status of standard of living that has gone down significantly in the past few months and he warns that the situation may deteriorate further.

The statement from the Bank of England Governor cites the reasons of “rising food prices, sky-rocketing fuel costs, inflation and unaffordable interest rates on housing finances”.

Britons have enjoyed a decade of high spending on luxury goods, holidays and second homes, fuelled by low interest rates, easy credit and near-record lows in living costs. Inflation is UK has hit the seven months highest value, where in the fuel price inflation is at around 19.5%, its second highest in the decade that starts from 1997 to 2008.

Though the governor indicated that Britons may expect further rate cuts, but the cut will not be substantial in value to help the falling economy. He cited that though there have been many rate cuts offered by Bank of England, but it is not surprising that the mortgage lenders and other loan offering organizations are not passing on the benefit to the citizens, because all of them are perceiving tougher economic conditions ahead, where things may go from bad to worse.

Sending a warning to families who expect the value of their home to increase in the coming years, Mr King added: "Looking several years ahead, there’s no reason to expect house prices to be markedly above where they are now. It’s conceivable there might be falls in house prices."

The falling standard of living is just a precursor.

Gone are the days when people used to spend lavishly on fancy gadgets, new cars, second homes and other costly accessories. It’s time now to worry about the basic necessities of life – paying the monthly bills may turn out to be problematic for many people. As per a study by “The Daily Telegraph”, the household bills have gone up by GBP 1300 per year.

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UK Home Repossessions: Highest since 1999

The latest data figures released by the CML or council of Mortgage lenders indicate a disturbing sign in the UK real estate markets. Look at the graph below (source BBC), which indicates the no. of homes repossessed by the mortgage lender or mortgage company because the borrower was unable to repay the loans.



The graph clearly indicates that there has been a consistent rise in the repossessions since 2003 and it is at its highest levels now. Not only that, the current set of mortgage borrowers, a significant number of them are reported to be repaying their mortgages using Credit Cards – which means taking one credit to return a previous one.

The mortgage lenders are directing the issue to higher cost of living, higher amount of bills that people have to pay and high cost of food as well. No wonder why living in a city like London requires a fortune – simple things like moving around in a car in central London forces you to pay heavy congestion charges. The recently released US consumer spending data appears no good either.

Anyways, the data is no way a good indicator of the economy. If this is the state of a so called developed country, how about the so-called emerging economies like India & China?

Banks in India are learnt to throw away loans to anyone and everyone. Then to “recover” the loans, they need to hire “recovery agents”. Things with such data are definitely no good. Emerging economies are still highly dependent on exports to the developed countries.

China for electronics, etc and India for manufacturing & software exports. If the developed economies face such a situation where they find their consumers spending less and less, it is but obvious that the emerging economies will suffer. The picture emerging on the global front is definitely not that of convenience, where one can simply play around with his investments. It may take a long time before this depressing situation gets away with and the economy returns to normalcy.

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