Shares and dollar fall after Chinese rate hike: Economy Roundup

The share market has fallen over 1% this morning, after the People’s Bank of China announced last night it will raise the lending rate and the deposit rate by a quarter of a percentage point each.

The move, which comes as a surprise for most financial markets, has also sent prices of gold, copper and oil lower this morning. Economists are worried that as China attempts to curb its recovery, any affect will spill over onto global growth rates.

The rate increase is the first in 2007. It comes after the government ordered large banks to increase their capital reserves, in order to reduce the amount of money fuelling the local property boom.

“The interest rate rise is entirely outside of market expectations,” Zhu Jiangfang, chief economist at CITIC Securities in Beijing, told Reuters.

“The recent rise in headline inflation has put the real rate into negative territory. And I think that’s why the central bank needs to raise interest rates in such a hasty way,” he said.

The benchmark S&P/ASX200 index was down 63 points or 1.36% to 4592.5 at 12.15 AEST, while the Australian dollar has dropped almost two US cents to US96.83c.

NAB shares lost 1.4% to $24.93, while Commonwealth Bank shares lost 0.8% to $50.22. Westpac dropped 1% to $22.50 as ANZ lost 1.1% to $23.46.

Meanwhile, Woolworths sales have come up lower than expected, with the company’s food and liquor division recording comparable store store growth of 2%, while total sales are up 4.2% compared to the previous corresponding quarter. The company said it has been forced to cut prices and grow customers in the “tougher retail environment”.

Comparable petrol sales grew by 0.09%, while comparable sales for the Big W chain dropped by 3.9% during the quarter. The company said this was because of “tightening consumer spending and the cycling on the flow on effects from the 2009 government stimulus package”.

“This sales result is a solid start to the financial year which continues to hold underlying challenges for the retail sector such as tighter consumer spending and the deflationary impacts of the stronger Australian dollar,” Woolworths chief executive officer Michael Luscombe said in a statement.

Australia’s economic activity growth has slowed for a fifth consecutive month, according to the Westpac-Melbourne Institute leading index.

The index, which indicates the likely pace of economic activity three to nine months in the future, fell 0.1% to 5.3%. It is above the long-term trend of 3.1% but below the March reading of 10.3%.

“This is in line with the Reserve Bank’s current forecast for growth in 2011 which it released in its Statement on Monetary Policy in August. However we expect growth to slow in 2012 whereas the RBA is expecting growth to remain above trend at 4%,” Westpac economist Bill Evans said in a statement.

RBA warns on financial regulation

RBA head of financial stability Luci Ellis has told a financial services conference that financial groups must reveal more information to regulators regarding their activities. She said it is important that regulators be able to see the build-up of risk where it happens.

“All of these concerns imply that financial institutions will be expected to report – and disclose – more information than in the past,” she said. “Financial stability analysts don’t just need accurate data: we need more data, new analytical tools and in some cases a broader approach to that analysis.”

Ellis said the financial crisis has proven that it is important to show regulators how they are operating, and that she is not convinced that financial supervision should only be within the bank or outside it.

“Where the supervising entity sits matters far less than whether it has the powers, resources, and – most importantly in my view – the organisational culture to do its job effectively and independently.”

The Government has said the Coalition should support new legislation designed to structurally separate Telstra. The reintroduced bill will help improve competition and deliver improved services, it says.

“We are delivering these reforms, working with Telstra, and they are important to Australians everywhere,” prime minister Julia Gillard told a press conference this morning. “So that’s why today we’ll introduce legislation that allows a smoother transition and handover of the copper network to NBN Co.”

Meanwhile, as reported by The Australian Financial Review, fund manager Perpetual is looking for an alternative takeover bid to the $1.75 billion offer taken from private equity group Kohlberg Kravis Roberts.

A spokesman told the publication that a committee of board members and advisors plan to resume discussions regarding the bid today.

US optimism boosted by corporate profits

Analysts in the US have been given a boost of optimism after Goldman Sachs and Bank of America reported better-than-expected financials, but ultimately stocks fell due to fears over mortgage bonds.

While Goldman’s revenue fell by over 33% during the quarter, profits were still up higher than expected. Equities trading net revenues were down 43% to $US1.05 billion, however, the investment banking division reported net revenue up 24% to $US1.12 billion.

And while Bank of America reported better than expected figures, analysts say investors are still uneasy. “Foreclosures are everybody’s sole question right now,” Keefe Bruyette and Woods Inc analyst Jefferson Harralson told Reuters.

“It’s a large number, and it’s an unknown number, and that’s making people uneasy.”

That sentiment was largely felt on Wall Street, where investors fear banks’ exposure to mortgage bonds will leave them exposed to billions in losses. The Dow Jones Industrial Average dropped 165 points or 1.48% to 10,978.62.