How the employment report may help the credit market

The question may be whether the lower Rates will filter through to the Retail borrower. Here is a report out of the UK yesterday that questioned what a Central Banker really has to do to overcome this Credit Crisis.

"U.K. Banks plan to tighten lending;
U.K. lenders told the Bank of England they plan to reduce the supply of credit to consumers and companies in the 1st quarter, threatening to deepen an economic slowdown. Banks reduced the supply of secured credit to households "materially" and cut debt to companies "significantly" in the past 3 months, the central bank said in its quarterly survey of lenders. They plan to pare loans to those borrowers further, the report said."


Begs the question that if the Rates get lowered, are the Institutions going to lend out more, or will they look to reduce their Balance Book losses first, and lend later?

Tiffany TheLFB

Tiffany, that's a good comment but I would generally anticipate that US corporations will try to drive growth as a way to clean the balance sheet rather than pulling back. That may be different in the UK though, but I am looking at the US labor report and borrowing rates in the US.

Additionally, its not a question of whether these yield changes will filter through to retail customers. Its already happening. Falling yields have been filtering through to mortgage borrowers since July 07 when the TNX topped out. In fact, the most recent reading from Freddie Mac, released yesterday, showed this trend has continued with 30 year rates at 6.07% versus the December average of 6.10%.

The real question is not whether rates fall but how far they have to fall to make a big difference in the economy and the credit market.

For those interested in more information about relative yield rates in their fundamental analysis of the EUR/USD check out the charts here: http://pfxglobal.com/index.php?option=com_content&task=view&id=1360&Itemid=229

John - PFX

If we were to ask those who have tried to get a remortgage, line of credit, secured loan, or to try to get out of an ARM Mortgage, whether they have found it easier since July to get qualified, there would probably be a consensus that lenders are not actually passing the liquidity that lower Rates should bring, on as readily as we may think.

The Rates may be lower, as you say, they have been ticking down since July, but have you seen the Fico score that you need to be able to borrow now? If you are not very well qualified, or not able to furnish good equity, you are not getting lower Rates. That is how it should have always been, many will say.

Retail customers must be able to get access to credit if the Economy has any chance of growing. Business owners will need to see money filtering through to their local Bank, to enable them to secure lending to be able to hire staff, and buy inventory.

The Rates may have been filtering lower, but lenders are not lending as they were, and the whole Sub-Prime, poor qualification, lending process has gone. There are few lenders willing to underwrite poorly qualified borrowers at lower Rates. You can get loans, but they are not at low Rates, and that maybe defeats somewhat the object of lowering the Overnight Rate in an effort to help Housing.

Without access to new Credit the US consumer is unable to draw on Savings, the savings rate is negative 0.4%, and therefore the Consumer driven economy hits the buffers. Lower Rates may be out there, but not accessible maybe to the section of the Economy that historically has driven US Growth; The Consumer and Small Business.

It may not be an option for Corporations to drive growth, in an environment that has lower internal consumption. The upcoming Earnings Season looks to be a bit of an eye-opener;

"Projections for S&P 500 companies’ fourth-quarter earnings swung to a 6.1 percent drop on Monday from an 11.5 percent rise on October 1, in the biggest quarterly move since Reuters Estimates started compiling analysts’ forecasts in 1999".

In reality, it would seem to that Rates will need to drop another 50 Basis Points, at least, to stimulate the required lending that will impact the Consumer, to reverse the Labor trend, and start to clear Housing Inventory. Maybe at that time Corporations, who have been absorbing the impact of higher Commodity costs because of being unable to pass them on as they compete with cheaper Imports, may be able to drive growth. There may not be too many CEO’s looking forward to the Earnings Conference calls this time around.

50 Basis Points then draws is the Energy Inflation question. Commodities are up over 50% year-over-year, some individually more than that, Energy Inflation is all consuming. The US Trade Balance shows how much the Economy relies on Imports, and the Economies that they are getting Imported from are loaded with Inflation, as are the Goods that are leaving their shores. The US is Importing Inflation. Lowering Rates by 50 Basis Points develops a breeding ground for Inflation to seep into the Economy. None of it adds up too well really, however you slice it lower Rates may not be the answer, there are deeper Boom and Bust Cycle questions that need to be addressed here, maybe.

Futures Contract traders have priced in over a 50% chance of a 50 Point cut by the Fed, these are people that make a Market, and they are seeing lower Rates, hopefully Mr and Mrs Jones will see lower Rates as well.

50 Basis Points may force the Dollar lower, and Equities higher. Poor for the Yen and the Dollar maybe.