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WASHINGTON - United States consumer prices moved up a bit less than expected last month.

The number of new housing units on which work started, meanwhile, fell to the lowest in 17 years. leaving the Federal Reserve some room to lower interest rates to ward off a housing- led slowdown.

The Commerce Department said yesterday that housing starts dropped 11.9 per cent to an annual rate of 947,000 units, the slowest pace since March 1991 and well below the 1.02 million units expected by economists.

“These housing starts suggest that the pace of decline is intensifying, which is the last thing the US economy needs right now,” said Mr Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

Separately, the Labour Department said consumer prices rose 0.3 per cent last month, slightly less than expected, after a flat reading in February.

Stripping out food and energy, core prices, which also held steady in February, moved up an even milder 0.2 per cent, restrained by a big drop in the cost of clothing.

US stock prices shot up at the open yesterday, as investors saw the price data as leaving more room for the central bank to keep cutting interest rates to try to spur a slowing economy.

After two hours of trading, the Dow Jones Industrial Average was up 179.78 points to 12,542.25.

The Fed has lowered benchmark borrowing costs by three percentage points since mid-September last year, trying to ward off spreading weakness from the deep housing downturn and a related drying up of credit.

The report on consumer prices showed rising energy costs continuing to exert upward pressure on overall inflation.

Energy prices shot up 1.9 per cent last month. The cost of petrol, which hit record highs during the month, rose 1.3 per cent.

Year on year, consumer prices were up a sharp 4 per cent on the back of surging energy costs.

REUTERS

Source : Straits Times - 17 Apr 2008

ZURICH - The world’s top bank regulator said yesterday it wants to tighten rules and raise the cost of issuing and trading risky securities, giving a clear signal that supervisors are cracking down following the United States sub-prime crisis.

The Basel Committee on Banking Supervision laid out a road map for new regulations, saying it would attempt to close the gaps in the framework of global rules that were exposed by billions of dollars of shock losses in the ongoing financial crisis.

The moves will undoubtedly raise the cost of banking services, including that of issuing and owning structured, asset-backed securities, and also for trading overall.

The committee also aims to see banks secure safer sources of liquidity to keep their day-to-day operations flowing smoothly after several banks, including Northern Rock in Britain and Bear Stearns in the US, suffered crises that threatened to derail the global financial system.

“Supervisors cannot predict the next crisis, but they can carry forward the lessons from recent events to promote a more resilient banking system that can weather shocks, whatever the source,” said Basel committee chairman Nout Wellink in a statement.

The Basel committee said that it will revise the Basel II Framework - which sets minimum capital requirements for banks, as well as other measures to tighten risk management. This is aimed at setting higher capital levels for complex structured credit products such as collateralised debt obligations and other asset-backed securities. Details will be published later in the year.

In addition, a consultation paper on standards for the management and supervision of liquidity risks will be published in July.

Guidance will also be issued by next year, requiring banks to make enhanced disclosures relating to complex securitisation exposures.

Banks have lobbied hard for regulators to take a light approach, saying they aim to put their own houses in order first.

The Basel committee includes central bank and watchdog officials from the Group of Seven countries.

REUTERS, AGENCE FRANCE-PRESSE
 
Source : Straits Times - 17 Apr 2008

While the outlook for the region remains reasonably favourable, there are downside risks

This past weekend, at the IMF-World Bank Spring meetings, finance ministers and central bank governors from around the world met amid serious financial market turmoil which began in the US sub-prime market and continues to spread across asset classes and regions.

Yet for many in Asia, the discussions surrounding this turmoil may have seemed remote. After all, Asia continues to grow robustly, while financial institutions in the region have largely escaped the problems confronting their counterparts in the United States and Europe.

Moreover, improved macroeconomic frameworks and financial oversight - not to mention the accumulation of vast reserves - mean that Asia is generally far less vulnerable than a decade ago and better placed to implement needed policies to deal with a global slowdown.

Nevertheless, 2008 is likely to be a challenging year for the region. Already there are signs that exports to the United States and European Union, and electronics exports in general, are slowing, as are retail sales. While Asian financial institutions appear to have limited exposure to sub-prime and related assets, and there is no sign of a credit squeeze, the region has not been immune to contagion - equity markets have fallen, spreads have risen, and corporate debt issuance has declined sharply.

The IMF projects that growth in emerging Asia will decline by about 1.5 percentage points but, at 7.5 per cent, would still lead global growth. At the same time, inflation is rising across the region. This initially reflected spikes in food and commodity prices pushing up headline inflation, but pressures are recently showing signs of broadening, with core inflation moving upward as well.

While the central outlook for the region remains reasonably favourable, there are downside risks. The IMF’s World Economic Outlook projects a 1.25 percentage point decline in the global growth, to 3.7 per cent in 2008, led by a mild recession in the United States.

But with the financial crisis spreading - and notwithstanding dramatic and helpful actions by major central banks - a significant possibility of a deeper slowdown in the US and globally remains.

How big an impact might such a sharper slowdown have on Asia?

In our April 2008 Asia and Pacific Regional Economic Outlook we find that, while over the last 15 years, spillovers from US growth to Asian growth have been modest - with a one percentage point US slowdown leading to a 0.25 to 0.5 percentage fall in Asian growth - the impact today could be significantly larger.

Despite Asia’s success in diversifying its exports, both trade exposure to, and financial integration with, the United States have actually increased over this period, and Asia’s business cycles are increasingly aligned with US cycles.

To date, a slowing of exports to the United States has been partly offset by strong exports to non-traditional markets, notably in the Middle East and Latin America. But this reflects the positive impact of high global commodity prices on these two regions, and in a global slowdown both commodity prices and the positive impact on Asia’s exports could moderate.

Moreover, while Asian financial markets have held up well, a further deterioration in the global financial environment could affect the region, by raising funding costs, reducing confidence or increasing the volatility of capital flows.

In a worst-case scenario, a US credit crunch could spill over to Asia, lowering growth in the region.

On the positive side, Asia is well-positioned to implement macroeconomic policies needed to protect against these risks.

For now, central banks in much of Asia should focus on rising inflation pressures. For some countries, notably China, more flexible exchange rates would allow for a more effective monetary policy, while stronger currencies would dampen inflation.

In the face of a sharp slowdown, however, inflation could ease, and many countries would have scope for a more accommodative monetary stance. Fiscal policy could also play a role - prudent policies in much of Asia have created ‘fiscal space’ which can be effectively used if needed.

Given the prominence of financial risks, additional steps may be required. First, monetary and supervisory authorities should be focused on monitoring risks related to ongoing questions about exposure to potentially impaired assets. Regulators also need to ensure that risk management - including of liquidity risk - remains appropriate.

Second, the authorities should review contingency plans to ensure they are prepared for any worsening in the financial environment. Central banks should clarify conditions under which liquidity facilities might be activated, while the authorities also should formulate plans to handle potential calls for bank recapitalisation.

Over the last decade, Asia has become increasingly integrated into the global economy, and has benefited with a period of sustained and rapid growth. On the flip side, it now finds itself unable to escape fully the impact of global financial and economic turmoil. But timely and appropriate policy responses can mitigate the impact of this turmoil and help ensure that the region continues its strong economic performance this year and beyond.

The writer is director of the Asia and Pacific Department of the International Monetary Fund

Source : Business Times - 16 Apr 2008

HSBC exec sees sustainable rally in equity markets before year-end, writes GENEVIEVE CUA

The US economy is likely to bottom this year and equity markets should stage a sustainable rally before year-end, says HSBC Investments chief investment officer Leon Goldfeld.

But there will be no rally until the market sees signs of an economic turnaround, he says. The key metrics are a slowdown in job losses and housing inventory.

‘I still believe the second half will kick-start a rally that is sustainable, particularly for this region,’ he says. ‘In a sense, I’m an optimist with a time lag - perhaps in the third or fourth quarter.

‘Between now and then, we’re likely to be in a volatile range. Investors should focus on buying the dip rather than selling on a rally. If the market does dip, it’s a very good time to accumulate, particularly in May and June as it gets closer to a trough.’

This year so far, global MSCI indices are down 8-9 per cent. Asia ex-Japan has fallen more steeply, about 12 per cent. Volatility, measured by the VIX index, has trended down after peaking in March.

Mr Goldfeld says that financial stress will continue to generate bad news. But he points to some potentially contrarian signals. One is that while the financial sector is expected to write off up to US$800 billion, roughly US$1.3 trillion of bank stocks’ market capitalisation has already been wiped out. Part of the downdraft reflects the expectation that banks’ profitability will fall in the future, as fee income from securitisation shrinks.

In terms of valuations, global equities are trading at a price earnings multiple of about 14 times, and Asia about 12 times. ‘The market is building a buffer for negative years. Analysts have a positive earnings consensus, but the market is discounting a 20 per cent decline in earnings,’ Mr Goldfeld says.

Fund managers are overweight on cash. Surveys of investment advisers are uniformly bearish, which historically has been a good short to medium-term contrarian signal. Credit spreads have also widened to the level of previous recessions. US corporations, however, entered the downturn with strong balance sheets and low gearing. These strong financials are one reason that the economic downturn is unlikely to be deep, and unemployment at 4.5 to 5 per cent is relatively tame.

One caveat is that the recovery, when it occurs, is unlikely to be sharp. ‘My suspicion is that as banks have to repair their balance sheets, the recovery will be relatively subdued. US growth may be anaemic for a year or two, but 2008 should be the trough,’ says Mr Goldfeld.

He is most optimistic on Asia, where he believes that asset prices could reach bubble proportions after markets begin to rally.

‘Once we hit a bottom, I think we could rally very high especially in Asia and the emerging markets,’ he says. ‘There is a massive amount of cash in the system. Treasury bills are yielding 0.5 per cent. No one will live with that. Once things improve, people will take risk and it will be in areas where there is confidence and high growth expectations. Once people sense the trough, you can easily see 20 per cent in gains in two months. That’s the historical pattern.’

In its latest report, BCA Research says that scepticism appears to be entrenched in the US market, which is ‘eventually positive’ from a contrarian standpoint, “especially within the context of good value and record setting stimulus efforts”.

Net repurchases of own stock by the US corporate sector hit a record high in the fourth quarter. BCA says that while it would be more bullish if corporate resources were directed towards expansion, equity repurchases do confirm that valuations are attractive.

Source : Business Times - 16 Apr 2008

(NEW YORK) Group of Seven officials, who have signalled concern over a sliding US dollar for the first time in 13 years, may have to match talk with action before the currency stages a sustained rebound.

US Treasury Secretary Henry Paulson, European Central Bank (ECB) president Jean-Claude Trichet and G-7 counterparts warned after talks in Washington on Friday that recent ’sharp fluctuations’ in exchange rates risk hurting the global economy.

Sounding the alarm over the weakest dollar since the 1970s may still fail to buoy it so long as the ECB refuses to follow the Federal Reserve in cutting interest rates. Wariness of backing rhetoric with intervention may also limit the new language’s effectiveness.

‘Officials are clearly more concerned about the dollar, but are not yet ready to openly threaten the market because they know they would not be credible with the ECB’s reluctance to lower interest rates,’ said Stephen Jen, head of currency research at Morgan Stanley in London.

ECB council member Yves Mersch said on Saturday that the bank can’t afford to cut interest rates this year with inflation likely to breach its 2 per cent limit in 2009.

The dollar rose to US$1.5725 per euro at 3:09 pm in Tokyo, from US$1.5808 late in New York on Friday. It earlier reached US$1.56 a euro, the strongest level since April 3. The currency traded at 100.92 yen from 100.95.

The G-7 shifted its stance after the dollar’s decline accelerated since the group met in February, slumping 8 per cent to a record low against the euro and 6 per cent versus the yen. Volatility on options for the dollar rose to 14.5 per cent last month, the same as when the group last tried to prop up the US currency in 1995.

The change represented a victory for European governments increasingly concerned that the dollar’s slide threatens their exports. “I hope this concerted wording on currencies will help,” French Finance Minister Christine Lagarde said in an interview with Bloomberg Television.

Mr Paulson may have acquiesced in part because the lower US dollar is pushing up the price of oil, and could pose a danger to foreign investment in US stocks and other assets, said Jim O’Neill, chief economist at Goldman Sachs in London. — Bloomberg

Source : Business Times - 15 Apr 2008