Interview: State Street Global Adviser --- Ned Riley
>> u.s. stocks rise after the fed raised rates by a quarter point. traders say the market sees the decision as confirmation the economy is improving. the careful wording of the fed’s statement indicates greenspan and colleagues will not surprise the market. for more on what that means globally, i’m joined by ned riley, chief investment strategist with state street global advisers. u.s. stocks rose on the fed’s decision, the nasdaq at a three-year high. why do you think markets reacted that way?
>> because of the predictability factor. clearly, the federal reserve met the expectation of the street. they raised 25 basis points in the federal funds rate. interestingly enough, that’s a substantial reduction from where we were in 1999 of 7%. the other factor had to do with the fed alluding to the moderate growth in the economy, almost the goldie locks scenario, and quiescence of inflation in the shorter and longer term. the real positive was the fact that the 10-year treasury bond declined in yield, substantially lower today, 4.2%, than it was in may at 4.9. so the market liked the predictability of it.
>> state street more or less anticipated the fed move. how have you tweaked your portfolio before the rate increase?
>> it’s interesting. if you look at the portfolio overall, what we’ve been investing in are stocks that actually are somewhat interest sensitive. the financial stocks , in particular, those that are dependent upon the rise in market value, are clearly one area we’re focused on. the other has to do with technology. we believe strongly that technology needs to lead the market and despite wall street’s opinion and negative opinion prevailing about technology stocks , we feel we’ve had good support so far and as long as the nasdaq keeps ahead of the s&p and dow jones, i think we’ll have a stronger market in 2005, as well.
>> where do you see the fed funds rate headed next year and which sectors would like to benefit given the trend in interest rates?
>> i think basically the federal reserve needs to curtail its activity in the first half. i look at the economy as being moderate in growth, no question about it, but it’s not speeding up sufficiently to generate 200,000 jobs. i think the fed has to focus on the fact that globally things are slowing down, that the u.s. economy is growing at maybe 3%, that payrolls growth in the united states is only between 100,000 and 125,000 jobs and the bottom line is we’re lacking the stimulus we had a year and two years ago. we don’t have tax cuts, rebates, margin brackets down anymore. we’re losing the stimulus we had to get the economy afoot. i think the federal reserve has to be careful in terms of how far it goes in terms of raising interest rates and creating a hurdle to growth in the economy.
>> which sectors would like to benefit given the trend in interest rates?
>> i think we’ll rotate into more defensive areas of the marketplace. i like the pharmaceuticals simply because they’re at the bottom of the list, the worst performers the last two years. all of the negatives are known about the group in particular. when you start to look at the prevailing opinion on wall street, it’s clearly negative. a contrarian by nature would say maybe pharmaceuticals will have a good chance in 2005. then there’s personal products, things like procter & gamble and household products that grow with the rate of the economy but still have earnings growth two or three times of the economy. that area looks pretty good. third, i like technology. i think we’re still in the midst of enhancing productivity, buying equipment for productivity gains and companies are learning that labor costs are rising too fast to put their money in labor and i think the bottom line is we are going to see a substitution of labor for capital.
>> ned, we have half a minute, how do you think global markets will react to the fed’s decision when they open for trade?
>> i think they’ll be on the up side. i think the predictability factor is there and the fed is clearly probably the only active central bank that will be raising interest rates for a while. if anybody else does, i think it’s catastrophic in that clearly global growth is not up to what everybody had anticipated. clearly, the e.c.b. needs to hold off in terms of raising rates. if not anything, i would suggest they may have to lower them. and the central bank interventions are going to continue because our trade deficit is still wide. we have a $55 billion monthly trade deficit, much due to goods coming into the country.
>> we have to leave it there, thank you, ned. ned riley of state street global advisers. jetstar began its first commercial flights this week. jetstar’s chief operating officer when we return.
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Listen Interview: The U.S. interest rate decision --- David Tweed
limo and he and the rest of the fed policymakers raise the benchmark interest rate at a quarter point and say they will continue to do so at a measured pace. japan’s manufacturers are becoming less optimistic about the country’s economic prospects for the first time in 18 months. the tankan survey is due out. investors speculate the fed’s comments on inflation mean the fed won’t take a more aggressive stance on interest rates. for more on the fed’s monetary policy and how it may affect the trading in asia, let’s go to david tweed in sydney. will the u.s. interest rate decision have much of an effect on stock trading in asia?
>> any indication that the u.s. may pause raising rates might be good for the rest of the market. we’re already seeing that the nikkei futures traded in chicago are indicating a higher open there and also australian futures are indicating the same thing here. robert daluchia with prudential, summed it up by saying he’s willing to say inflation is likely to surprise on the low side and there’s a high probability that either in february or march they pause and the australian central bank indicates they’re a step ahead.
>> it’s a situation we’re facing is not the same as the fed is facing. they’re coming from the lowest interest rate in living memory and needing to get back to normal. we’ve done most of that work, certainly, if not pretty close to all of it.
>> that partly explains why we’re seeing a decline in the australian dollar against the u.s. currency this morning, cathy.
>> in less than two hours we will have the tankan survey of business confidence in japan. how are japanese stocks likely to react to that report?
>> the key, when we’re looking at the tankan survey, is whether the number comes in better or worse than the expectations of economists who are expecting 22. last time, on october 1, when the tankan survey was person than expected, we saw japanese stocks rise led mainly by domestically tied companies. the bank’s index was up around 3% on that day. watch out for mitsubishi tokyo financial or mizuho financial, both could react high or low depending on whether the number is better or worse than expected when it comes out.
>> the u.s. federal reserve raised its benchmark interest rate by a quarter point. the vote to raise the overnight lending rate to 2.25% was unanimous. the statement said inflation is expected to be relatively low. for more on the fed’s decision, i’m joined by ken goldstien in new york, an economist with the conference board. what does the fed’s statement today tell you about the outlook for the u.s. economy?
>> it tells tells us more about where we’ve been than where we’re going. given the relatively weak employment report, i felt they must have needed to temper some of the language but given what’s happened to the p.p.i. and c.p.i. in october and november, it is clear that inflation is moving up and let’s keep in mind, one of the things that the fed is most charged to do is to fight inflation, not inflation right now, but inflation down the road. if these p.p.i. and c.p.i. numbers continue to edge up month after month in 2005, that could well be the big story in 2005.
>> given these concerns, what about the pace of interest rate increases next year? where do you see them headed?
>> i think they’ll continue on this road. i don’t think they will raise interest rates every single six-week interval by a quarter point but they will be busy and we could see interest rates a full point to point and a half or more higher this time next year than where we are. so in addition to the 125 point, already five interest rate increases in 2004, we could see still more, more than five in 2005.
>> the fed mentioned the labor market conditions are continuing to improve gradually. you said last month, labor demand going forward is relatively flat. has your view changed?
>> no, because the numbers haven’t changed, not in terms of job advertising in print or on the internet or even in terms of the unemployment insurance claims or announced layoffs so that some of the forward indicators of where employment is going certainly haven’t changed. what we could see is relatively weak employment conditions like what we saw in november. not that weak, but certainly less than people have been anticipating. if the labor market in the united states is going to turn up, that’s likely to happen starting in the spring and summer, not this winter.
>> is there any chance the fed may turn aggressive in raising interest rates next year?
>> well, you know, what we’ll do is more what happens on the inflation front than on the employment front so the pig question and not just for the fed, but across the board in terms of profit and employment and economic growth, is what happens to price in 2005.
>> where do you see the yields for the 10-year note by the first half of next year, then?
>> that’s one of the big concerns here because the fed has raised five times going from 1% to 2.25% while the bond market has bid the yield on 10-year notes down from 4.7 to 4.1, moving in absolutely opposite directions. that can’t continue. so if the fed is to continue to raise rates or even if they slow that down a little bit, that suggests that what’s going to happen in the bond market at some point in 2005 is that they’ll reverse course and bond yields will start to rise. that combined with what happens in the real estate market here as well as with respect to the exchange rate, could be good news, better news than otherwise would be the case, for stocks in 2005.
>> kenneth, greenspan’s made it clear that a weak dollar is necessary to cut the current account deficit. do you see the fed raising interest rates to close the current account gap, and if so, is there risk of recession?
>> there’s not a risk of recession in 2005. i think there’s more of a long-term consideration with respect to the current account and where interest rates have to go given what’s going on with the dollar so i think that’s not so much a consideration for what happens in 2005. certainly not in the first half of 2005. that’s more of a longer term consideration going south into 2006 -- going out into 2006 to 2008.
>> thank you, kenneth. after the break, i’ll speak with the chief investment strategist at state street global advisers.
