Interest rates may be returning to the "old normal" of tracking inflation rates (which is currently low).]
Why Very Low Interest Rates May Stick Around
Neil Irwin
New York Times
DEC. 14, 2015
The Federal Reserve will most likely raise interest rates this week for the first time in nearly a decade. To understand what it means — and doesn’t mean — consider a previous year in which interest rates were on the rise.
In 1920, borrowing costs soared to their highest levels since the end of the Civil War. Some people were terrified of what it was doing to the economy. Higher rates “would practically legalize usury,” a real estate trade group warned. A Democratic senator complained that “manufacturers, merchants and businessmen are entitled to stability” after a steep rise in rates. The Federal Reserve was “confronted with conditions more or less abnormal,” acknowledged a governor of the central bank, William P. G. Harding.
The interest rate that caused this anxiety? A mere 5.4 percent on the 10-year United States Treasury note — lower than the rates during the entirety of the 1980s and most of the 1990s.
What does this have to do with the Fed’s likely move this week? For years, financial commentators have been predicting an imminent rise in rates. After all, goes the theory, the Fed has been engaged in extraordinary interventions to artificially depress the cost of borrowing money. Surely those rates will snap back to their pre-2008 levels, if not rise higher. If that happens, get ready for double-digit mortgage rates and a substantially higher cost to maintain the government debt.
But if you look at the longer arc of history, a much different possibility emerges. Investors have often talked about the global economy since the crisis as reflecting a “new normal” of slow growth and low inflation. But, just maybe, we have really returned to the old normal.
Very low rates have often persisted for decades upon decades, pretty much whenever inflation is quiescent, as it is now. The interest rate on a 10-year Treasury note was below 4 percent every year from 1876 to 1919, then again from 1924 to 1958. The record is even clearer in Britain, where long-term rates were under 4 percent for nearly a century straight, from 1820 until the onset of World War I.
The real aberration looks like the 7.3 percent average experienced in the United States from 1970 to 2007.
“We’re returning to normal, and it’s just taken time for people to realize that,” said Bryan Taylor, chief economist of Global Financial Data, which scours old records to calculate historical financial data, including the figures cited here. “I think interest rates are going to stay low for several decades.”
If so, it would mean that many predictions through the last several years of ultralow interest rates have misread the situation. “Once the economy gets going, then interest rates are going to take a big leap,” said George Soros, the billionaire hedge fund manager, in a 2013 CNBC interview.
“We can expect rapidly rising prices and much, much higher interest rates over the next four or five years,” wrote the economist Arthur B. Laffer in The Wall Street Journal in 2009. In 2014, all 67 economists surveyed by Bloomberg predicted higher rates six months hence; they fell sharply instead.
Of course, rates could go up. But what that analysis may have missed is that interest rates historically are most closely tied to inflation. How much investors demand as compensation for lending their money is shaped in no small part by how much they think that money will be able to buy when they get it back. And the pressures that normally generate inflation seem to have disappeared in recent years.
The Fed and its counterparts overseas at the European Central Bank and Bank of Japan have spent the last few years applying every policy they can think of to get inflation to rise up to their 2 percent target, with limited success. In a world awash in supply of workers, oil and more, financial markets show little sign that investors think that will change anytime soon. Current Treasury bond prices predict annual inflation in the United States of only 1.7 percent a year over the next three decades.
That would imply that we are in an economic era more like the late 19th century, with persistent low inflation or mild deflation, or perhaps like the 1950s, when the economy was growing but inflation was firmly in check.
“If we keep inflation under control, maybe we’ll enter a period like the ’50s,” said Richard Sylla, a financial historian at New York University and co-author of “A History of Interest Rates.” “Those were normal rates, and they were accompanied by a slight amount of inflation, 1 or 2 percent. That worried people then, where now it’s a target to be reached.”
Both financial markets and Federal Reserve officials seem to believe some version of this forecast. To understand why, it helps to start with a bit of the math behind the multitrillion-dollar bond market.
A crucial driver of long-term interest rates (which the Fed doesn’t directly control) is what investors think the Fed will do with short-term interest rates (which it does control). If people thought the Fed was going to raise short-term interest rates up to 5 percent soon, no one would lock their money up in a 10-year bond paying only 2.2 percent.
And while the central bank is likely to move that rate up a quarter percentage point at the two-day meeting that ends Wednesday, in their most recent forecasts Fed officials have made clear that they don’t expect that rate to rise back to levels that were common before the global financial crisis.
At the onset of the crisis in 2007, the Fed’s official target rate was 5.25 percent. Now the officials’ median forecast for that rate’s longer-term level is a mere 3.5 percent.
In other words, even after they are done with a series of rate increases, Fed officials envision interest rates substantially lower than they were. If anything, financial markets think even this is too optimistic. Thirty-year Treasury bonds are currently yielding 2.9 percent, implying that markets expect the Fed’s target rate to be even lower than Fed officials expect over the coming decades.
Markets, and Fed forecasts, can be wrong, of course. Neither in 2007 predicted the sharp downshift in inflation and rates that was to come in the crisis. And our understanding of what shapes inflation and growth dynamics is quite limited.
Still, starting with Japan in the 1990s and now across the advanced world, the predominant problems of the last several years have revolved around weak demand, plenty of supply, low inflation and resulting very low interest rates. The simple fact that the Fed is poised to raise rates a bit above zero doesn’t change that.
But the lessons of history do offer this guidance: Whether rates will be high or low a few years from now has very little to do with what the Fed does this week. It has quite a lot to do with what happens to forces deep inside the economy that are poorly understood and extremely hard to forecast. And just because many people are old enough to remember the high inflation and high rates of the 1970s and 1980s doesn’t mean that is the normal to which the economy will inevitably revert.
Singapore interest rates rise ahead of Fed's decision
Dec 15 2015
Cost of lending going up for mortgage holders and business owners in Singapore
Grace Leong
SINGAPORE - Local interest rates are inching up and investors are on edge as the countdown to Thursday's decision by the United States Federal Reserve begins in earnest.
It is widely expected that the Fed will raise interest rates from near-zero levels - the first such rise in nine years - and the effects are already rippling through Singapore's financial and currency markets.
The greenback has strengthened against the Singdollar. More importantly, for mortgage holders and business owners, the cost of lending is going up.
The three-month swap offer rate (SOR), a benchmark for commercial loans and some home loans, spiked to a new three-month high of 1.59168 per cent yesterday from 1.50597 per cent last Friday and 1.39520 per cent on Thursday. The previous high was at 1.56409 per cent on Sept 8.
It is now almost four times higher than at this time last year.
It is a similar story with the three-month Singapore interbank offered rate (Sibor). The Sibor, which is used extensively to price home loans, hit a two-month high of 1.12865 per cent yesterday and is now almost three times higher than its level 12 months ago.
This means the monthly repayments on a $500,000 loan with a 25-year period pegged to Sibor will be $168 more than a year ago, while one pegged to the three-month SOR will be $262 more.
The US rate hike has been flagged for several months, during which a rising number of home owners have switched to fixed-rate mortgages, and a new product pegged to fixed deposit rates was launched.
SOR loans became popular around 2010-2011, when SOR started to dip below Sibor.
Most home loans extended by DBS Bank, Singapore's largest provider of mortgages, are pegged to Sibor, with fewer than 500 based on SOR, said Mr Tok Geok Peng, its executive director of secured lending.
Personal finance portal MoneySmart.sg estimates that 45 per cent of mortgages are pegged to fixed deposit rates, 50 per cent to Sibor and the remainder to SOR, based on loan take-ups in the past two months.
ABN Amro chief economist Han de Jong noted that this will "undoubtedly be one of the best flagged rate increases ever, so it is hard to see how people can be caught off guard, but you never know".
DBS Bank economist Eugene Leow said: "We expect a 25-basis point hike but much of this has already been priced into the market.
"We suspect that Sibor and SOR rates will likely rise by a smaller magnitude than US rates."
DBS sees Sibor at 1.4 per cent by the first quarter next year.
The rate talk has also hit stocks and currencies as investors wait on the sidelines for a decision. The US dollar rose from 1.4095 to the Singdollar last Friday to 1.4129 yesterday while local share investors, who seem determined to keep their powder dry until later in the week, left the benchmark Straits Times Index down 0.69 per cent yesterday.
Prices of private homes in Singapore likely to stay depressed
DEC 10, 2015
Over-supply a key factor and analysts expect cooling measures to stay in the near term
Rennie Whang
SINGAPORE - There will not be a major correction next year but factors from oversupply to lending curbs will keep prices of private homes and executive condominiums (EC) depressed, say analysts. They also warn that any let up on cooling measures seems unlikely in the near term as the price falls have not affected most owners.
Mr Desmond Sim, CBRE research head for South-east Asia, told The Straits Times yesterday: "Most developers are still propped up by holding power as well as land prices, which continued to be quite high over the past year.
"Unless developers are willing to take a big cut in profits, new sale prices should be quite stubborn."
Prices of new homes could fall 3 to 5 per cent next year although projects with many unsold units may cut even more, according to Ms Alice Tan, head of research at Knight Frank Singapore.
The prospects are no better for ECs, with average prices coming down from a high of over $800 per sq ft (psf) in the first half of this year to $780 psf in this half, said R'ST Research director Ong Kah Seng. Average EC pricing next year should be lower, at $750 to $780 psf, he added.
Unsold stock is a key issue bedevilling the private market, with around 24,000 new units languishing in the market. Apart from the amount of unsold units, developers will be under increasing pressure to sell due to Qualifying Certificate penalties and the Additional Buyers' Stamp Duty (ABSD), he added.
Developers have been trimming prices all year as market realities began to bite. Median prices at The Panorama, for example, fell from $1,343 psf at initial launch in January last year to $1,226 psf in October, noted Mr Wong Xian Yang, OrangeTee research manager.
Sims Urban Oasis prices were down from $1,397 psf at the February launch to $1,285 psf in October.
It is clear that buyers - governed by both the Total Debt Servicing Ratio (TDSR) and ABSD - are being more selective.
Mr Elson Poo, general manager of marketing and sales at Frasers Centrepoint Homes, said they are focusing on projects that offer attractive pricing as well as other value propositions such as lifestyle concepts or prime locations.
Frasers Centrepoint has sold around 760 units so far this year, largely thanks to the popular North Park Residences.
Developer MCC Land has also chalked up a tidy number of sales this year, up 55 per cent from last year to 354 units. If MCC Land includes development projects that it manages for Hao Yuan Investment, its total sales would be 487, similar to 470 units sold last year.
While slightly fewer new private home sales took place this year - the tally of 6,619 units in the first 10 months was 4 per cent lower than last year's - the unsold stock of private homes has been falling. There were 24,149 units unsold in the third quarter, an 18 per cent fall from the same time last year and 25 per cent down compared with two years ago, noted Ms Tan of Knight Frank. "The adjustment of prices, albeit at a moderate level from about 2 to 3 per cent discount, coupled with pent-up demand, especially from local homebuyers, has helped improve take-up rates in the last two quarters," she added.
In the resale market, prices at the top five projects this year have fallen between 6 and 11 per cent from 2013, according to OrangeTee, although prices rose at one of the developments.
Resale volumes may have increased but rents are still expected to remain soft due to the many completions expected next year and limited growth in foreign labour numbers, said Mr Wong of OrangeTee.
EC developers could get more desperate to sell where there are more than 300 unsold units at a project, such as Sol Acres, The Criterion and The Terrace, said Mr Ku Swee Yong, Century 21 chief executive officer.
"The raised income ceiling of $14,000 (earlier this year) does not seem to have brought in many buyers," he said.
Overall, private home prices are down about 8 per cent from their last peak in the third quarter of 2013.
Never mind US$35, world's cheapest oil is already close to US$20
Dec 15 2015
LONDON (BLOOMBERG) - As oil crashed through US$35 (S$49.30) a barrel in New York on Monday (Dec 14), some producers were already living with the reality of much lower prices.
A mix of Mexican crudes is already valued at less than US$28, an 11-year low, according to data compiled by Bloomberg. Iraq is offering its heaviest variety of oil to buyers in Asia for about US$25. In western Canada, some producers are selling for less than US$22 a barrel.
"More than one-third of the global oil production is not economical at these prices," said Mr Ehsan Ul-Haq, senior consultant at KBC Advanced Technologies Plc. "Canadian oil producers could have difficulty in covering their operational costs."
Oil has slumped to levels last seen in the global financial crisis in 2009 amid a global supply glut.
While the prices of benchmarks West Texas Intermediate and Brent hover in the US$30s, they represent a category of crude - light and low in sulfur - that is more highly valued because it is easier to refine. Some producers of thicker, blacker and more sulfurous varieties have suffered heavier losses and are already living in the US$20s.
A blend of Mexican crude has plunged 73 per cent in 18 months to US$27.74 on Dec 11, its lowest level since 2004, according to data compiled by Bloomberg. Venezuela is experiencing similar lows. Western Canada Select, which is heavy and sulfurous, has slumped 75 per cent to US$21.37, the least in almost eight years.
Other varieties including Ecuador's Oriente, Saudi Arabia's Arab Heavy and Iraq's Basrah Heavy were selling at below US$30, the data show.
Bitumen - which technically is not crude but a heavy black viscous oil that constitutes the so-called tar sands along with clay, sand and water - is trading at around US$13 a barrel, suffering a drop of more than 80 per cent since June 2014.
Crudes of this type trade at a discount to lighter varieties because to process them "refiners have to invest in upgrading facilities such as coking plants, which are very expensive", KBC's Ul-Haq said.
Said Mr Torbjoern Kjus, an analyst at DNB ASA in Oslo: "Most places in the world, a lot of the producers they don't really get the Brent price, and they don't get the WTI price. It's really a dramatic situation that really cannot continue for a very long time for many producers."
Mexico's government insulated itself from the oil slump after it managed to hedge 212 million barrels of planned exports for 2016, using options contracts to secure an average price of US$49 a barrel. The nation's 2015 oil hedge provided it with a bonus of US$6.3 billion.
But not all oil-producing nations are as well protected. Opec member Venezuela's national budget for next year assumes a price of US$40 when its own crude is trading at just above US$30. The country's dollar reserves have fallen by 32 per cent this year to US$14.6 billion.
Even oil prices from Opec, which supplies about 40 per cent of the world's crude, are trading below the main two benchmarks. The daily price of 12 crudes produced by the Organisation of Petroleum Exporting Countries stood at US$33.76 a barrel on Monday, the lowest in seven years.
Ironically, those selling at the lowest prices have even more incentive to pump, potentially deepening the glut that is weighing on prices.
"A lot of the producers might want to sell as much at current prices," rather than a level that could be even lower in coming weeks, Mr Abhishek Deshpande, an analyst at Natixis SA, said by e-mail.
That's a distinct possibility, according to Trafigura, the world's third-biggest independent oil trader. "I don't think we have reached the bottom of the cycle yet," Mr Christophe Salmon, chief financial officer at Trafigura, said in an interview on Monday.
Low employment growth persists for third quarter: MOM report
Dec 15 2015
Olivia Ho
SINGAPORE - Low employment growth persisted in the third quarter of 2015,while unemployment edged up for residents and citizens, according to the Manpower Ministry's latest labour market report released on Tuesday (Dec 15).
The third quarter continued the year's trend of exhibiting the lowest employment growth in six years.
While total employment grew by 12,600 - about 3,000 more than in the preceding quarter - it was almost one-third the growth in the same period in 2014.
The first three quarters saw a total of 16,200 workers added to the labour force - a sharp fall from 89,400 in the same period last year and the lowest growth since the recession year of 2009.
These employment gains were driven mainly by the services sector, which added 13,300 workers - although wholesale and retail trade and real estate services continued to cut back on hiring.
A slackening in construction activities saw slower employment growth in that sector, while hiring for manufacturing tumbled for the fourth quarter in a row amid continued weakness in output.
While overall unemployment remained stable at 2 per cent, it rose for residents and citizens for the second quarter in a row, amid softer economic conditions. It went up to 3 per cent for residents and 3.1 per cent for citizens, up from 2.8 per cent and 2.9 per cent in June.
More workers were laid off in the third quarter, with 3,460 being made redundant. This was about 200 more workers than in the preceding quarter, but comparable to the same period last year.
Layoffs rose across all sectors, with professionals, managers, executives and technicians (PMETs) making up about 70 per cent of all residents retrenched in this period.
Meanwhile, the rate of re-entry into employment within six months of redundancy remained unchanged from the previous quarter at 55 per cent.
But job-seekers aged 40 and above found it increasingly hard to find new employment, as their re-entry rates fell for the third quarter in a row.
Job openings continued to outnumber job-seekers, but the ratio evened out further, with seasonally adjusted vacancies declining over the quarter by 11 per cent to 55,600 in September.
This brought the ratio of job vacancies to job-seekers down to 116 openings per 100 seekers, from 121 in June - levels not seen since the first half of 2013.
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