The world speculated
all year about who would succeed
Alan Greenspan as the new Chairman
of the Federal Reserve at the end
of January, following his 18-year
tenure. Speculators had narrowed
the field of candidates down to
6 and then to 4. The favorite was
Bernard Bernanke (Chairman of the
Council of Economic Advisors), followed
closely by Glenn Hubbard (Dean of
Columbia Business School) and Martin
Feldstein (an economist at Harvard
University). Donald Kohn (Secretary
of the Federal Reserve's Open Market
Committee since 1987) was seen as
the "dark horse". The two outside
candidates were Roger Ferguson,
current Fed Vice Chairman and John
Taylor, an academic economist from
Stanford University.
Bernard Bernanke's key strength
is that he is an "outspoken advocate
of inflation targeting", however,
his "limited non academic experience"
is a potential negative. Glenn Hubbard
is viewed as being a strong supporter
of tax cuts, while Martin Feldstein
has been a "key architect of Mr
Bush's plan for social security
reform" and was chief economic advisor
in the Reagan administration. Donald
Kohn, in his role as Secretary of
the Federal Reserve's Open Market
Committee since 1987 has had "a
ringside seat watching Mr Greenspan
run the Fed" and was possibly "best
placed to preserve his [Alan Greenspan's]
legacy".
The speculators had it correct.
Months of speculation were ended
on 24th October when George Bush
announced that Bernard Bernanke
would replace Alan Greenspan to
become the 14th Chairman of the
Federal Reserve in January next
year. Wall Street reacted favorably
to the news. Not everyone was pleased
by the announcement, though, as
concerns were expressed about Benanke's
"little experience outside the economic
realm".
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| Source:
BBC.COM |
Responding to the news of his appointment,
Mr Bernanke said, "my first priority
will be to maintain continuity with
the policy and policy strategies
under the Greenspan era". However,
there are some who wonder how he
aims to achieve this in view of
the fact that Alan Greenspan is
famous for his view that Central
Banks should keep the markets guessing
on "how tough they would be on inflation",
whereas Mr Bernanke is known to
be a firm promoter of inflation
targeting. Inflation targeting is
used by the Bank of England and
the European Central Bank, where
the "central banks set a target
for inflation and stick to it".
A remark that he made in an address
to the National Economists Club
on 21st November 2002, which he
has tried to imply was made tongue
in cheek, has come tack to haunt
him. He said, "like gold, U.S. dollars
have value only to the extent that
they are strictly in limited supply.
But the U.S. government has a technology,
called a printing press (or, today,
its electronic equivalent), that
allows it to produce as many U.S.
dollars as it wishes at essentially
no cost." How will he deal with
this issue, we wonder?
While Mr Ben Bernanke has much to
celebrate, there will be little
time do so once he takes up office
next year. He will need to be focused
on dealing with pressing issues
such as the balancing act of raising
interest rates in the face of the
recent tropical storms, the potential
impact of consistently high oil
prices on inflation, the growing
trade deficit, the housing price
"bubble" and the US Dollar, to name
but a few. This will clearly not
be an easy task, especially with
the whole world watching and waiting
to see how he plans to address these
issues.
Following 12 consecutive increases,
interest rates reached their highest
level since the spring of 2001.
In a unanimous decision, rates were
increased by another 0.25% to 4%,
when the Federal Reserve met on
1 November. The statement released
after the meeting by the Federal
Reserve indicated that, although
the "cumulative rise in energy and
other costs have the potential to
add to inflation pressures, core
inflation has been relatively low
in recent months and longer-term
inflation expectations remain controlled".
Because the Federal Reserve have
indicated that they will continue
to increase rates at a "measured
pace", the market is expecting at
least another two 0.25% increases
- one at each of their meetings
scheduled for the 13th December
and the 31st January (Greenspan's
last meeting).
There is much debate about what
Benanke will do.
Will he continue where Greenspan
left off, or will the Fed raise
rates by 0.50% in December to avoid
raising rates in January, making
a clear distinction between the
Greenspan "era" and the new Benanke
"era"? Some believe that consumer
spending patterns will be one of
the key factors that Benanke will
need to keep a close eye on.
Amidst fears that the recent hurricanes
would impact severely on economic
growth, the latest figures released
have confirmed that 3rd quarter
GDP growth came in above forecast
expectations (of 3.6%) at 3.80%.
This is better than 2nd quarter
GDP, which was 3.3%. This number
provides support for the view that
the Federal Reserve is likely to
continue raising interest rates
for the time being.
According to statistics recent hurricanes
(Katrina and Rita, but excluding
Wilma, the most recent hurricane)
trimmed some 502 000 jobs in the
United States in September and October.
However, the Labor Department has
confirmed that the "number of hurricane
related claims have been leveling
out after the initial rush in mid
September following the hurricanes."
In October the unemployment rate
declined to 5%, with 56 000 new
jobs being created. Household debt
levels relative to disposable income
increased to 124% in the 2nd quarter,
increasing from 117% a year ago.
Interest rates remained at 2% for
the quarter under review, having
stayed at these levels since June
2003. Inflation is currently 0.50%
above the target of 2%, largely
due to the consistently high oil
price. The European Central Bank
has received calls for both interest
rate cuts and increases this year,
making their decision regarding
the next rate move an extremely
difficult one. The region is faced
with inflation above its target
on the one hand, and slower growth
due to higher commodity prices on
the other hand. The remedy for one
is to raise interest rates, while
the solution for the other is to
reduce rates. The ECB has alluded
to possible rate increases soon.
However, the Organisation for Economic
Co-operation and Development (OECD)
have recently warned against rate
increases until the second half
of next year to avoid stifling economic
improvement in the region. They
are of the opinion that there are
currently no signs of "inflation
spreading".
Eurozone GDP growth in 2004 was
2.1%, however, forecasts for growth
in 2005 have been revised down to
1.2% from 1.6% previously. Commenting
at a presentation to the Danish
Central Bank recently, head of the
European Central Bank, Jean-Claude
Trichet said "you will probably
share the view that the growth performance
of the Euro area cannot be deemed
fully satisfactory. But it is equally
true to say that the single monetary
policy, geared towards price stability
and the anchoring of inflation expectations,
lends ongoing support to economic
activity." The Euro has weakened
by more than 15% against the US
Dollar this year, fuelled by disappointing
economic growth in the region which
has resulted in interest rates being
lower than those of its main trading
partners. Other factors that have
impacted negatively on the currency
include the German election debacle,
together with a number of failed
referendums (France and the Netherlands).
The Bank of England kept rates on
hold at 4.5% during the quarter
under review. The "no change" decision
at the November 10th meeting was
widely expected following on from
data indicating that inflation had
reached new highs in September.
Inflation fell to 2.3% in October
(from 2.5%) and is currently 0.30%
above the target. Business leaders
were disappointed with the news,
having called for a cut in rates
to provide "a much needed boost"
for the manufacturing sector.
Gordon Brown has already conceded
that GDP growth will not be in line
with his target of between 3% and
3.5%, as set out in the last Budget.
According to the Ernst and Young
Item Club, GDP growth is expected
to be as low as 1.6% for 2005 and
they are "cautiously predicting"
GDP of 2.2% for 2006. This is sharply
weaker than the 3.4% GDP growth
recorded in 2004. Commenting on
these figures, Professor Peter Spencer,
the chief economic advisor for the
Item Club was far from complimentary.
He said "the chancellor is blaming
the UK economic slowdown on the
recent spike in oil prices and the
weakness of the European economy,
but this is unrealistic. The problems
were plain to see at the time of
last year's pre-Budget report in
December, but instead of addressing
them then, the Treasury chose to
dress up the UK finances for the
election."
Business confidence has weakened
and consumer spending has slowed
sharply this year. The main factors
contributing to this have been the
softening of the housing market,
combined with the high oil price
and a high interest rate environment.
Despite evidence that the economic
recovery appears to be gaining momentum,
deflation continues to plague the
region. Interest rates have remained
close to zero for four years and
are likely to remain accommodative
until there is evidence that deflation
is well and truly out of the way.
Commenting shortly after the release
of the better than expected third
quarter GDP figures, Bank of Japan
Governor, Toshihiko Fukui said "rises
in prices may not accelerate, but
it's unlikely that they will fall
back into negative territory once
they start rising." Private sector
demand, which has been boosted by
wage growth being positive for the
first time in many years and full
time employment rising for the first
time in almost a decade, has been
one of the main drivers of the economic
expansion this year. This is unusual
in that Japan has always been viewed
as an export driven economy. In
contrast to 2004, net exports have
not been the main drivers of growth
this year. Increased capital spending,
which is being boosted by robust
corporate earnings, is also having
a positive impact on the household
sector, thereby improving consumption.
Junichiro Koizumi's landslide election
victory in September, which now
allows him to sell state assets
to reduce debt and to implement
other reform policies in an attempt
to extend the economic recovery,
was well received by the markets.
Koizumi has indicated that he intends
to step down as party leader in
September next year. Following his
election victory, he reshuffled
various senior posts within the
cabinet. These moves "were closely
watched for clues as to his priorities
for the remainder of his term as
leader, as well as pointing to his
potential successor." The Bank of
Japan has estimated that this fiscal
year GDP growth is likely to range
between 2.2% and 2.5% and that in
the 2006 fiscal year it is expected
to range between 1.6% and 2.2%.
Will domestic interest rates remain
level for longer or will they start
to rise in 2006? This debate continues
daily and the consensus view changes
almost as often. Consumer inflation
surprised the market by declining
in September (to 4.7% from 4.8%
in August), but this news was short
lived when it was announced that
September PPI (Producer Price Inflation,
often an early indicator of what
inflation in likely to do) increased
by the largest margin in two and
a half years. This fuelled concerns
of an interest rate hike in December.
Adding to these fears were the Governor's
recent hawkish comments with regard
to the second round inflationary
effects brought about by the high
oil price. However, CPIX declined
to 4.4% in October, while PPI surprised
the market by coming in below forecast.
Encouraged by these numbers, concerns
of an interest rate hike in December
have been eased, with some economists
predicting that the likelihood of
a rate increase in the first half
of next year is now remote. The
current forecast by the Reserve
Bank is that CPIX should peak at
5.8% during the second quarter of
next year, before reducing to 5.3%
in the last quarter of 2007. Factors
that could impact negatively on
these forecasts are the unit cost
of labour, the Rand and the direction
of oil prices. Despite inflation
having remained within the targeted
band for the last 25 months, it
has risen fairly sharply from levels
of 3.5% in June. The Rand ended
the quarter unchanged against the
US Dollar, from the closing spot
price at the end of the previous
quarter. The currency appreciated
by 3.87% and 4.03% against the British
Pound and the Euro, respectively,
over the same period.
Trevor Manuel released the Medium
Term Budget Policy Statement (MTBPS)
on 25th October, the purpose of
which is to outline the medium term
expenditure structure of the government
and to provide an update of the
fiscal developments since the "formal"
budget in February. The highlights
were as follows:
- reduced fiscal debt as a
result of an expected excess
revenue collection of approximately
R30 bn
- due to sustained investment
spending, GDP growth has been
revised upwards
- with immediate effect the
lifting of "foreign exposure
limits on unit trusts and investment
managers to 25% of total retail
assets from 20% and 15%, respectively."
According to the National Treasury,
this could mean an outflow by South
African banks of up to R48 bn, should
they take advantage of the new ruling,
while unit trusts are now able to
invest a further R20 bn offshore.
In addition, there has been some
speculation that Government is looking
at relaxing exchange controls on
individuals (either in total, or
by increasing the current limit
of R750 000 per person over the
age of 18) once the amnesty process
has been completed. Reports indicate
that, as at 30 September 2005, some
90% of the 43 102 applications had
already been processed. The Governor
of the Reserve Bank has openly called
for exchange controls to be lifted
completely. Could this mean that
taxpayers can expect good news in
this regard as early as the annual
budget in February?
The oil price declined over the
period to end the quarter at $52.33
a barrel from the previous quarter
close of $66.26. Despite the sporadic
declines in price, supply and demand
issues as well as refinery problems
remain.
The gold price rose sharply, reaching
18 year highs of over $500 an ounce
during the quarter under review.
Gold last reached these levels in
1987 when the price touched $503.50
on the 15th December 1987. The gold
price ended the quarter at $494.30
an ounce, up 14.57% from the close
of $431.45 at the end of August.
The rise from levels of $250 an
ounce just three years ago has been
significant. It is believed that
global inflationary fears and "safe-haven
hedge buying" are the main drivers
of the price, with many investors
"being uncomfortable with currency
and bond markets". Strong "physical
and investment demand" from Asia
has also put upward pressure on
the price.
With this being our last report
for 2005 we would like to take this
opportunity to wish you and your
family a peaceful and happy festive
season and a prosperous new year.
Please make a note that our offices
will be closing at midday on Thursday,
22nd December and will reopen on
Monday 2nd January 2006.
QUARTERLY QUOTE
"Life consists not in holding good
cards but in playing those you hold
well"
John Billings
This report is based on information
sourced from various institutions,
both local and international. The
report reflects a variety of views
and is not intended to convey investment
advice. Please consult us to obtain
specific advice relevant to your
investment portfolio.
