Investors chase shares on hopes of US rate cut

Rising expectations that the US Federal Reserve will be forced to cut interest rates to revive the sagging economy this week were a key driver as Hong Kong stocks jumped 3.32 per cent yesterday.

A stream of weak economic data from the United States makes a rate cut by the Fed at its meeting tomorrow highly likely, according to analysts.

Hong Kong investors jumped on the bandwagon, sending the Hang Seng Index higher by 313.15 points as they bet that lower rates will mean better earnings down the road, particularly for banks and property companies.

'We had a strong day because of interest rates,' said Edmund Harriss, a fund manager with Investec Asset Management.

Though some markets were closed for a holiday there was some buying across the region on the interest-rate story. Taiwan rose 1.85 per cent and South Korea ended 3.86 per cent higher.

A rate cut in the US would be 'significant' for Hong Kong, said Eric Yuen, deputy head of research at Dao Heng Securities. It would reduce the Hong Kong interbank offered rate (Hibor) and therefore cut funding costs for banks.

'Demand for loans is pretty weak but a lower Hibor means corporates pay less interest expenses and that will benefit them,' he said.

Last night the US Commerce Department reported that manufactured goods orders fell 2.3 per cent in September from the previous month. However, the drop in orders was not as large as expected with an earlier poll of forecasters by AFX News pointing to a 3.0 per cent decline in September.

Another interest rate cut announcement by Fed chairman Alan Greenspan would be the 12th since it began easing rates in January last year. In that time the Fed fund rates has come down from 6.5 per cent to 1.75 per cent, its lowest in more than 40 years as the central bank battled to fend off recessionary forces.

Bond dealers in the US are almost unanimous in their belief that rates will be reduced. Some are even calling for the cut to be 50 rather than 25 basis points to re-invigorate a US economic recovery which is running out of puff.

There are growing signs that personal consumption by Americans, which accounts for two-thirds of gross domestic product (GDP), is tailing off. A strong consumer did much to limit the damage of last year's recession in the US. The worry now is that consumption spending could fall before the weak US corporate sector gets back in spending mode, resulting in the economy falling back into recession.

While GDP in the US rose 3.1 per cent in the third quarter, growth was ebbing towards the end of the period. In data released on Friday, personal consumption fell 0.4 per cent month on month in September while monthly vehicle sales dropped to a four-year low last month.

Many commentators blame US economic weakness on a debt-driven investment boom in the 1990s and warn that reducing interest rates will not bring a swift return to strong global growth.

Some commentators even fear that a further rate cut could be harmful by raising expectations for growth and inflation which in turn could lead to rates on long-duration debt actually rising.

'The thing that would potentially cause a double dip [recession] more than anything is if Fed cuts on Wednesday,' said Jim Walker, chief economist with CLSA. 'The last time they cut rates the yield curve steepened really quite dramatically. Long bond interest rates moved from 4.7 per cent to 5.4 per cent eventually and that's the thing this year which has curtailed any investment expenditure.'