Yesterday was another sloppy day for stocks which sagged under the weight of earnings misses and dismal 2009 guidance (Nokia (NOK), Merck (MRK)), big layoff announcements (AT&T (T), DuPont (DD)), weak chain store sales numbers and ever widening credit spreads for corporates. This sell off comes despite another supportive plunge in the price of crude oil and more eye catching rate cuts from central banks in New Zealand, Indonesia, Sweden, UK and the Eurozone..
Today’s Market Moving Stories
- In a speech yesterday, Fed Chairman Helicopter Ben Bernanke said that “another promising proposal for foreclosure prevention would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the H4H or another FHA program”. Meanwhile, Fed’s Evans, a voting member of the FOMC in 2009 said that “we likely are in for a protracted period of poor economic performance. But the policy actions taken by the Fed and other governmental agencies over the course of the financial crisis, and the effort of the private sector to work through its difficulties, will eventually help support a recovery in economic growth.”
- ECB President JC Trichet added a new word to his lexicon yesterday. Europe won’t suffer deflation he opined. What we’re seeing is “disinflation” (rapidly falling inflation). Watch this space as the new staff forecasts were eye catching in their massive downward revision of inflation for 2009. This will allow the ECB elbow room to cut faster and deeper than we have become accustomed to in 2009. A terminal rate of 1.5% now looks probable.
- The UK government needs to print tons of gilts to fund the current crisis. Solution – sell them to the UK banks! It is actually in the guise of an FSA edict which is going to require banks to build their holding of gilts from the current 5% of assets to a range between 6% and 10% of assets. The asset switch involved will be a minimum of £87m to a max of £353bn. That compares with a gilt issuance schedule of probably around £150bn in 2009. The idea behind the move is to build confidence in banks’ asset quality and to improve their liquidity in difficult times. Trouble is that the switch also means lower revenues and lower banking profits when banks are struggling to stay in the black as it is.
- At the US Senate Committee hearing, automakers said that they would be willing to accept strict conditions on any Federal bailout. Beggars can’t be choosers! Do they have any choice? GM (GM) and Chrysler said they’d accept a merger. It transpired that GM need $8bn and Chrysler $4bn right now just to keep them going ‘til year end.
- The stunning reversal in the price of crude oil continues apace ($43.80). This is particularly bad news for Russia (who may not even be able to afford to sail battle ships through the Panama Canal), Iran (who produce the wrong type of oil anyway) and Venezuela (it may teach Hugo 'Che' Chavez some manners). Airlines of course are the main beneficiaries and headline inflation figures look set to continue to drop like a stone.
Breaking Up Is Hard To Do
Is it just me or have those ECB press conferences become staid charades with the same muppet reporters asking the same stupid lets-try-and-catch-out-JC-Trichet questions every month? Why don’t they ask him what the spreads on European government bonds are hinting at? They are flashing amber and may well turn red soon.
What is this spread? Well it is the price that the respective governments have to pay over where the European benchmark German bonds trade. I’ll choose two outliers, Italy and Greece, for my examples. For the last number of years the cost where they borrow has been stable enough at around 20-40 basis points over the benchmark. It is a premium to represent the fact that neither Italy nor Greece have as strong a credit rating as the Fatherland.
So where is this spread now? It has blown out to 140 bps (1.4%) and 170 bps (1.7%) for Italy and Greece respectively! This is far higher than before even the advent of the single currency the euro! The euro is meant to narrow spreads! With 10 year bond rates in Germany now at 3% this means that the market is demanding a premium of 50% to buy the government paper issued by Europe’s two laggards.
What is this telling us? Well, it is implying that there is a chance of Greece and Italy leaving the euro and devaluing their respective currencies. This was the traditional route these countries used at times of economic crisis.
Well it's time to don the helmet as the first Friday bringeth the monthly US jobs report (non farm payrolls) at 13.30GMT. It is expected to show a –333k drop with the unemployment rate rising to 6.8%.
As ever, the usual cavaets apply i.e. beware the lemming like reaction to the snap headline number. This has, more often than not, to do with the positioning of traders going into the number and can often be five minutes of frenzied profit taking. Look for any up-tick in the unemployment rate that’s greater than expected, and for any big revisions upwards to the previous month’s job loss numbers.
My own gut feeling is that on the back of the two dire ISM numbers earlier this week, traders will have a number worse than the economists forecast of –333 in their heads ! I know this sounds counter intuitive but I think we will need the number to be considerably worse than this to cause a fresh sell off. We may even get a relief rally.
And Finally… The US Recession In A Historical Context