At long last we see some positive data out of the US. There was stronger-than-expected growth in employment and worker productivity and a fall in labor costs. ADP Employer Services said firms added 189,000 jobs, more than triple the amount analysts anticipated. The US Labor Department reported that worker productivity was greater in the third quarter than initially estimated.
The markets rallied towards the end of this week on hopes that the US Federal Reserve will cut interest rates next week and on government plans to help home owners. It seems almost certain that rates will be cut. The Fed Fund Futures is pricing in a 100% chance of a 25 basis point cut and a 50% chance of a 50 basis point cut.
The market received a boost from US Treasury plans to hold interest payments steady for many sub-prime borrowers facing foreclosure. Treasury Secretary Henry Paulson has concluded that the housing market needs a stronger response from Washington. The plans will freeze rates for as long as five years for some sub-prime borrowers.
The tussle for Rio Tinto continues, with rumours flying around the market this week. There were reports that Baosteel put forward a bid that was denied by Rio Tinto. The Chinese government also seems interested but is unlikely to be a successful bidder. Rio Tinto continues to maintain that the BHP Billiton bid undervalues the company. A merged entity would be responsible for approximately 40% of iron ore imports into China.
Australia kept interest rates unchanged as expected at 6.75%. The New Zealand central bank also kept rates unchanged at 8.25%
Australia’s trade deficit increased by $1 billion from September to October to a record high of $3 billion, mostly due to frenetic activity in the mining sector. Exports have been constrained by lack of adequate infrastructure, causing bottlenecks in the ports. The drought has also been an ongoing impediment to exports, with agricultural companies reporting poor earnings this season. Record oil prices and the high Australian dollar have added to exporters’ troubles.
The European Central Bank and the Bank of England both made interest rate decisions this week. The ECB kept rates unchanged while the BOE cut rates by 25 basis points. This is the first rate cut in England since August 2005 and highlights the fact that troubles in the credit markets are not confined to the US. Slowing global growth is affecting all markets.
Interest rates were the deciding factor for the markets and will continue to be next week. There were five major interest rate decisions – in Australia, New Zealand, England, Europe and Canada. Four of the countries kept interest rates unchanged, citing market volatility and global uncertainty. Only the Bank of England cut rates.
Interest rates are a double-edged sword. The market is hoping for a 50 basis point cut in the US next week to reinvigorate the US economy. If 50 basis points are cut, however, it will be a signal to the market that the US economy is in a worse state than previously thought.
Head of Fundamental Analysis
HUBB Financial Group