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Market barometer: Federal Reserve may hike interest rates in August

Friday 14th July 2000

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Dow Jones industrial index

The US Federal Reserve's decision through its federal open markets committee (FOMC) to leave interest rate settings alone seems to have stumped the sharemarket.

Bulls would argue the Federal Reserve's passing up on an interest rate hike should encourage share buying, while bears would maintain the central bank is simply waiting for a chance to crank up rates at its next FOMC meeting on August 22.

American economic data is mixed but the 5.5% annualised growth from the first quarter will not suit the Federal Reserve, which would probably want to see the rate toned down to the 2.5-3% zone by next year.

The impending American presidential election could mean the Federal Reserve may use August as its last remaining rate hike month until the election is held in November to avoid political interpretation of its activities.

With the election out of the way, the truth should be known about whether the Federal Reserve is nearing the end of its year-long interest rate increase cycle or if it yet has much more time to go on playing the cycle out.

Even if the US economy slows, Europe continues to grow strongly and Japan is alleging 10% first-quarter growth, albeit from off a weakened economic base.

Opinion is divided as to whether the Federal Reserve should confine its concern to the American domestic economy or should instead take a global view on inflation risk. In the meantime sharemarkets are likely to be nervous until the August FOMC meeting is behind them.

Main world indices are treading water. The Dow Jones industrial index (illustrated) is still not willing to budge far from its 10,500 point average, while the Nasdaq composite still struggles to better 4000. London's FTSE-100 is lodged around the 6400 range.

Australian indices are buoyant, however, with the all ordinaries off above 3100 due to a strong industrials sector augmented by some revival from mining.

Local indices have missed much of the Australian rally, perhaps further hampered by our weak currency and a string of poor economic confidence indicators.

The NZSE-40 appears to be capped at 2050, while the smaller companies index is wavering at the 5100 mark.

Fletcher shares look as if they are being re-rated as the farewell to Paper draws nigh. Energy is robust as it appears set to challenge old highs around $8 but even the domestically exposed Building is doing better in the 230-plus cps area. Air New Zealand B shares are lifting from 220cps after the departure of the chief executive, while Auckland International Airport has begun to pick up speed in the 260cps support region. Removal to Singapore has not done much for Brierley Investments, which languishes at the 33cps level, a danger zone for its executives if past performance is a guide.

Carter Holt Harvey seems set for one of its periodic upswings from 180cps support. Contact Energy is finding its feet at 280-plus cps.

Telecom is feeble under 750cps, whereas Australian rival Telstra has returned to market favour and has risen from weakness to traverse the 800-900cps band. Despite bright hopes held out for exporting, the country's largest marine export outlet, Port of Tauranga, has stumbled to below 500cps.

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