Behind latest Fed rate cut, inflation fears loom

The Straits Times – March 20, 2008

WASHINGTON – THE United States central bank cut interest rates by three-quarters of a percentage point to 2.25 per cent, less than widely expected but more than what some of its policymakers were comfortable with.

Two of the 10 voting members of the Federal Open Market Committee opposed the cut, preferring ‘less aggressive action’, according to the Federal Reserve’s statement on Tuesday. Markets had expected a bigger 1 percentage point cut.

It was the first time since September 2002 that a pair of policymakers defied their Fed colleagues, and analysts sensed a change in the central bank’s message.

‘The message was, we’re going to be vigilant about inflation,’ Mr Jerry Webman, chief economist at Oppenheimer Funds, told the Chicago Tribune.

He added: ‘We’re going to do other things which treat the problems but avoid going down the traditional monetary path straight into the jaws of inflation. The dissents were part of that message.’

In its statement, the central bank warned of further weakening in the economy and ‘considerable stress’ in financial markets. But one paragraph dwelt on the risks of inflation.

By cutting rates further, Fed chairman Ben Bernanke is placing a heavy bet that commodity prices and other leading indicators of inflation will come down on their own, aided by a slowing economy.

While allowing that ‘uncertainty about the inflation outlook has increased’, the Fed reiterated the view that slower growth and lower ‘resource utilisation’ will bring inflation back into the central bank’s comfort zone.

Given the inflation warnings, Mr Michael Lewis of Free Market said that ‘while the Fed may cut rates at the April 29-30 meeting, we expect that the easing arc is about finished’.

Mr Michael Woolfolk, currency strategist at Bank of New York Mellon, told the Chicago Tribune that the next step might be a coordinated effort by major nations to intervene in currency markets to support the US dollar.

Repeated Fed interest rate cuts, as well as a pessimistic outlook towards the US economy, has sent the greenback to record lows – worsening inflation by pushing up the prices of oil and other commodities.

REUTERS, WASHINGTON POST

Strong demand in Asia seen slowing next year

Business Times – 20 Mar 2008

This poses risks as firm US recovery unlikely: consultancy

 (SINGAPORE) Domestic demand in Asian countries this year look strong, but may slow down in 2009. This may present risks to regional countries as the US economy is unlikely to make a strong recovery next year, according to consultancy firm IMA Asia.

‘Many people in the United States say that (the plunge in global financial markets) will present difficulties for Asia because it would mean a slowdown in its export engine, but this is the second  year of slow export growth for Asia,’ noted Richard Martin, IMA Asia managing director. ‘Last year, export growth was pretty weak; it fell from 2006 for most countries in the region.’

He believes the region will sustain its demand growth for this year. ‘We think domestic demand looks secure in China, and in South-east Asia, we see good domestic growth… we’re pretty confident that domestic demand will carry the region for a second year.’

The issue, however, is ‘what happens next year’, said Mr Martin, who was in Singapore yesterday to speak to IMA Asia’s corporate clients on the region’s economic outlook.

‘By the time we get into the third year of weak exports growth, you’re going to see some difference (in growth) in the region,’ he said, adding that the US economy is unlikely to show a strong recovery in 2009.

And that difference, he said, will boil down to two factors – the level of country risk an economy faces, and the degree of reliance it has on the global market. ‘Economies with relatively high country risk will slow down a lot and have some volatility…we also need to look at the degree of reliance on the global market, not only trade reliance but also finance reliance.’

China, for one, ‘looks fine’ as its export sector makes up only about 25 per cent of its gross domestic product, while the country’s investments are financed from its domestic savings, he said. ‘However, we’ll see quite a different impact in a number of other countries. Hong Kong and Singapore face the prospect that their growths will be halved next year, because they’re highly dependent on global trade and global finance, and it’s the financial sector flows in the bank that are being cut back here.’

‘If it was just the trade cut back, we think domestic demand would keep (both economies) going, but once we cool that off, we could see a significant drop in growth in these economies.’ In view of these factors, Mr Martin advised companies to start revising their plans for next year.

Cheung Kong pips Far East in URA tender

Business Times – 20 Mar 2008

It offers $305psf ppr for West Coast condo plot next to Blue Horizon

 (SINGAPORE) Cheung Kong Holdings-linked Billion Rise yesterday pipped Far East Organization to emerge as top bidder for a 99-year leasehold condo site facing West Coast Park and overlooking the sea.

Billion Rise’s bid of $110.44 million or $305 per square foot per plot ratio (psf ppr) was just 1.4 per cent higher than the next highest offer of $301 psf ppr by Far East unit Tian Hock Properties.

The tender for the choice plot, next to Blue Horizon condo developed by Far East, attracted 12 bids. City Developments and TID, Allgreen Properties, Frasers Centrepoint, MCL Land, Sim Lian, a Kheng Leong unit and Hoi Hup Realty were among the other bidders. Entities linked to Alpha Investment Partners and Teambuild Construction also took part in the tender.

Yesterday’s outcome was in a sharp contrast to that at a state tender last week for a landed housing plot at Jurong West when there were just two bids – both way below market expectations. The Housing & Development Board, which conducted that tender, decided not to award the site.

On offer at yesterday’s tender, conducted by Urban Redevelopment Authority, was a more appealing site near the sea and a short drive from the VivoCity shopping and entertainment complex.

‘The plot attracted an overwhelming response of 12 bids from major and mid-size developers and contractors,’ said CB Richard Ellis executive director Li Hiaw Ho. ‘It signals developers’ confidence in the suburban segment despite the current lukewarm response to new projects.’

Notwithstanding the wide participation in yesterday’s tender, the top bid of $305 psf ppr was towards the lower end of the $260-400 psf ppr range of bids indicated by property consultants when the site was launched in January.

Industry sources suggested that Cheung Kong’s breakeven cost for the condo could be about $600- 630 psf. ‘It is likely that units in the proposed development will be sold at an average price of around $750-800 psf,’ said Knight Frank director Nicholas Mak.

Units at Blue Horizon next door were transacted at an average price of $740 psf in Q4 last year.

Market watchers had expected Cheung Kong, controlled by Hong Kong tycoon Li Ka-shing, to be awarded the latest site. The last time that a company in Mr Li’s stable was awarded a 99-year condo site in a state tender here was 11 years ago in early 1997, when Japura Pte Ltd placed the top bid of $456.51 psf ppr for a site in Bayshore Road, which it later developed into the Costa Del Sol condo that boasted sweeping views of Singapore’s eastern shoreline.

Costa Del Sol is in front of The Bayshore condo, which was developed by Far East. This time, the heavyweights took the competition to the West Coast.