Scott Murdoch – In a speech in Sydney today, Mr Stevens said at a time of rising unemployment it would be “disturbing” for policy makers if there was not more supply coming on to the market which would ensure prices remained under control.

The central bank boss also warned that for global policy makers “challenges abound”, especially the threat of inflation beginning to rise at a time when real economic activity was starting to gain traction.

“A very real challenge in the near term (for Australia is) how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices,” Mr Stevens said.

“Given the circumstances the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs, this ought to be the time when we can add to the dwelling stock without a major run-up in prices.

“If we fail to do that, if all we end up with is higher prices and not many more dwellings, then it will be very disappointing, indeed quite disturbing.”

The Reserve Bank may remove its easing bias on monetary policy at the August meeting, as financial markets back the prospect of higher interest rates over the next year.

The interbank futures market now predicts the cash rate of 3 per cent could be up to 95 basis points higher by July next year, indicating the RBA could order up to four official rate hikes.

The national housing market has held up well during the current economic downturn, which economists have attributed to the government’s increased first home owners grant.

As part of the two rounds of fiscal stimulus worth $60 billion, the government extended its first-home owners grant at $21,000 for new homes and $14,000 for existing homes until the end of September. It will then be stepped down to $14,000 for new homes and $10,500 for existing homes until the end of the year.

“The decline in interest rates, together with the additional grants for first-home buyers, has seen a significant pick-up in demand for housing finance,” Mr Stevens said.
“The value of loan approvals has risen by about a third since the low point in the middle of 2008.

“In contrast to developments in so many other countries, house prices are tending, if anything, to rise, and arrears rates on the bulk of mortgages remain very low by historical and international standards. “In fact, across some portfolios arrears rates have declined in recent months.”  Mr Stevens also said the global outlook had improved and emphasised the role of business and consumer sentiment and confidence in helping to lift economic conditions.

Mr Stevens said central banking and regulatory authorities would soon start to deal with winding back some of the emergency stimulatory measures put in place in the past year, especially after the collapse of investment bank Lehman Brothers in September. “For their part, banks will need to reduce their reliance on the extended guarantees and stand on their own feet before too much longer,” Mr Stevens said.

“The banks of the United States and Europe are starting down this path on their wholesale issuance, having recognised that it is in their own interests to do so.

“It would make sense for Australian banks, which have accounted for 10 per cent of global issuance of government-guaranteed bank debt over the past nine months, to step up their efforts to do likewise.”

Earlier today, RBA assistant governor Malcolm Edey said the government’s wholesale funding guarantee had served its purpose, but an exit strategy needed to be an important priority.

The RBA official said the guarantee fee structure was designed with an automatic exit in that banks would stop using the guarantee when market conditions allowed funding costs to return to more usual levels.

Some degree of international co-ordination in exit strategies was also required, though some countries could move independently, Mr Edey said.

“It’s important to have some degree of co-ordination (but) I wouldn’t say everyone has to do everything all at once,” the RBA official told a Senate inquiry hearing in Sydney.

Gerry Shih – Stocks were mixed Friday as broad market indexes finished slightly higher and the Nasdaq fell for the first time in 12 sessions, weighed down by disappointing results from Microsoft and Amazon.

The Dow Jones industrial average rose 23.95 points, or 0.26 percent, to 9,093.24. The broader Standard & Poor’s 500-stock index was 2.97 points, or 0.30 percent, higher at 979.26, while the Nasdaq was down 7.64 points, or 0.39 percent, at 1,965.96.

Shares of Microsoft, which announced a 29 percent decline in second-quarter profit on Thursday night, fell by 8.26 percent. The software giant blamed low business demand for its poor sales and said that Windows Vista, the operating system that the company had hoped would carry revenue, continued to struggle to gain customers.

Shares of Amazon fell by 8 percent after the company said that declines in video game sales and rising shipping costs pinched the bottom line.

The news from Microsoft and others was released after trading closed on Thursday and cast questions over whether the earlier string of better-than-expected reports might have led the markets a bit too much.

“Most of the profit surprises have come from cost-cutting or productivity enhancement, but the underlying comments the companies are giving are very cautious,” said Nick Kalivas of MF Global Research.

But Friday was bound to be an uneasy session, analysts said, as investors looked to sell shares and lock in profits from a two-week rally.

In the period from July 13 to Thursday, when the Dow closed above 9,000 for the first time since January, the index gained 10 percent.

“This has been a very powerful move,” Mr. Kalivas said, “so I think the market is ripe to consolidate itself.”

The market received no help from economic data Friday. Consumer confidence in the United States fell in late July to its lowest level since April on growing pessimism about the long-term economic outlook, especially about income and jobs, a survey showed.

The Reuters/University of Michigan Surveys of Consumers said its final July consumer sentiment reading fell to 66.0, from June’s 70.8, though it was slightly higher than economists’ median expectation for a reading of 65.0, according to a Reuters poll.

“People are a little more worried about the economy, especially over the labor market and what’s happening in Washington. It’s still consistent with the picture that the economy is bottoming out, but you are not going to get a big bounce in consumer spending,” said David Wyss, chief economist with Standard & Poor’s Ratings Services.

In the financial sector, two credit card issuers, American Express and Capital One, reported quarterly profit declines of about 50 percent on Thursday night. But shares of both companies shrugged off the reports and ended in positive territory, with Capital One gaining more than 8 percent.

Interest rates were steady. The Treasury’s benchmark 10-year note was unchanged at 95 20/32 and the yield held at 3.66 percent.

But concerns over the flood of supply in next week’s record $115 billion auction of government Treasury notes have been compounded by doubts about the timing of the sale when many bond dealers are away on holiday.

“Right now it’s dubious about who’s going to show up,” said Tom di Galoma, the head of fixed income rates trading at Guggenheim Partners.

But by far the biggest factor behind the bond market’s recent struggles has been the energized stock market. As investors continue to pull out of bonds to pursue higher equities returns, Mr. di Galoma said, yields will continue to rise.

Oil prices continued a three-week rally on Friday, rising to $68.05 a barrel on the New York Mercantile Exchange.