August 30th – Sept 3rd Stocks, Commodities, Forex Key Market Drivers

PRIOR WEEK

 

GDP Readings: US Revised Down, Germany Stable, UK Revised Up

 

US GDP was revised downwards from preliminary reading of +2.4% to +1.6% q/q in 2Q10  . That was still better than anticipated, and so the market viewed it positively. German GDP was in line with expectations but is expected to slow in coming quarters.UK GDP beat expectations and rose +1.2% q/q in 2Q10, compared with initial reading of +1.1%.

Continued US Fundamental Deterioration

 

US Housing Data

 

Annualized Existing Home Sales for July fell 27.2% to a record low 3.83 million (from a peak of 7.25 million in 2005)  vs. a forecasted 11% drop to 4.65 million.

New Home Sales dropped 12.4% M/M to an annual 276K, the lowest on record in a series going back to 1963. The government purchase incentives pushed sales forward, so many are now talking of further price cuts, especially in light of newly rising joblessness and stagnant incomes.  The average US home is now worth $204K, the lowest since 2003 – wiping out the gains of the bubble years.

Taken together, along with declines of prior months, the data indicates a stark lack of demand in the housing market. Housing inventory swelled to 12.5 months of sales or roughly double the ratio needed to maintain stable prices.

The news is ominous for US economic growth in H2 of 2010, July’s massive contraction is likely to have negative impact on other spending including.

Durable Goods 

The results badly missed their forecast, increasing by only 0.3% versus expectations of 3.0% rise.  Taking out the volatile transportation sector Durable Goods actually declined by -3.8% versus projections of 0.5% rise.

Added to last week’s disappointing Philly Fed report, the US manufacturing sector appears to be slowing markedly and in what may be an ominous sign for future US growth business capital spending showed a massive contraction in July. Orders for non-defense capital goods excluding aircraft declined by -8.0% – the worst such reading in 18 months.

Weekly New Unemployment Claims Beats Expectations, 4 Week Moving Average Still Rising

The DOL reports weekly initial claims was 473,000, a slight improvement over the expected 488K,  and a  decrease of 31,000 from the previous week’s revised figure of 504,000. However the decrease wasn’t enough to prevent the 4-week moving average from climbing to 486,750, an increase of 3,250 from the previous week’s revised average of 483,500.  

Bernanke Speech At Jackson Hole

 

As expected, Bernanke expressed guarded optimism about US growth and confidence that the Fed

has sufficient tools to stimulate the economy and combat deflation when there’s a need. Policy options include 1) additional purchases of longer-term securities, 2) modification of the Fed’s communication language, 3) reduction in the interest paid on excess reserves and 4) increase in inflation goals. It appears likely that further QE measures will be implemented, albeit not until there is enough further deterioration to convince the rest of the Fed governors.

Rising PIIGS Bond Yields

Standard and Poors downgraded Irish sovereign debt one notch to AA- adding a negative outlook on worries that bank bailouts would require even more taxpayers’ money. Generally spreads over ten-year Bund yields have widened to new records, Greece 950 basis points, Ireland 371, Italy 168, Portugal 340 and Spain a not quite record 190.

Less Prominent But Still Noteworthy

 

More China Real Estate Bubble Evidence

A report from a Beijing district that the majority of its properties have been vacant for years. See here for details.

Moody’s Warns On Slower EU Growth

It could lead to European sovereign debt downgrades.

ECRI WLI worsens

 

It’s been indicating double dip for a while now, continuing to do so.

Central Bankers Turning More Dovish,

–Axel Weber wants to delay tightening, as widely reported last week.

–Bernanke’s Jackson Hole speech suggests he’s just be waiting for more bad news on the US economy to get support of the rest of the Fed governors for more QE

–BoE voices also warn of tightening too quickly:  Dr. Martin Weale, one of the UK’s most respected economists, and  the newest member of the Monetary Policy Committee, warned that there was a real risk of a double dip recession in the UK

–BoJ may announce new easing later this week

COMING WEEK

 

Can The 1040 Support Level Hold For The S&P 500?

 

As our favorite single indicator of risk appetite, the index’s steady technical deterioration has correctly pointed to further declines in the past weeks. The 1040 level has tested and held in the past 4 session. A break below it will suggest a test of at least the 1010 level, given the lack of likely positive news coming. However, with expectations already low, stellar results aren’t needed to get a bit more upside. Note that with Friday’s rally, any close below 1043 means another bearish pair of lower-high and lower-low.  

Packed US Calendar To Update Picture of US Jobs, Manufacturing

 

Includes not only the week’s most important reports on US jobs, but also updates on the suddenly declining US manufacturing sector

Expectations calling for the typically market-moving Nonfarm Payrolls figure to show the economy shed 100,000 jobs in August, marking the smallest decline since the report turned negative for the first time this year in June. However, traders may be more focused on the Private Payrolls result to give a more accurate reading on the underlying strength of the labor market, because it is not distorted by census-related firings. A less optimistic forecast here, for a gain of 47,000 jobs, down from last month’s 71,000.

Other indicators are expected to produce mixed results.  Personal Income and Spending are forecasted to have increased in July, Consumer Confidence to move higher in August. The ISM manufacturing PMI is expected to drop for the fourth straight month, Pending Home Sales and Construction Spending figures are anticipated to continue falling, confirming the ongoing picture of deterioration in US housing markets.

As usual there will be a series of secondary labor market data providing hints about Friday’s jobs reports. ADP’s jobs report on Wednesday is forecasted to show an increase of 18,000 jobs in August, down from 42,000 in July.

Weekly claims for jobless benefits are tipped to remain solidly elevated on Thursday, edging up to 475,000 compared to 473,000 the week before.

Emergency BoJ Meeting May Hit The JPY

 

Late on Friday there were reports that the BOJ would hold an emergency meeting early next week, though no date was specified The BOJ is expected to increase its bank lending facility that provides three-month funding at 0.1% to 30 trillion yen (from 20 trillion currently) and extending the funding period to six months. Markets will be focused on whether it explicitly states that the measures are being taken to combat JPY strength. If so, it may signal a larger, coordinated effort between the government and the BOJ to weaken the JPY, and should send the USDJPY higher in the near term to around  the 87-88 range.

Wildcards

 

PIIGS Sovereign and Bank Bond, CDS rates – Spain, Portugal bond sales, but ECB statement unlikely to surprise

China Housing Bubble Data

News of US Banks Pressured By Asset Value Decline

Weekly Calendar Events

 

Monday

UK Bank Holiday though the UK’s Hometrack August Housing Survey is out,

Eurozone Confidence

US July Personal Income and Spending, plus Core PCE

Tuesday

 Japan: July Industrial and Vehicle Production, Retail Trade, Labor Cash Earnings, Housing Starts and Construction Orders, plus August Small Business Confidence

UK: July Money Supply and Consumer Credit, August GFK Consumer Confidence

EZ: German Unemployment, EZ16 CPI and July Unemployment

US: June CaseShiller House Prices, August Chicago Purchasing Managers, Consumer Confidence and Minutes of the FOMC meeting

Wednesday

Japan:  August Vehicle Sales

EZ: Manufacturing PMI’s for various European countries

UK: Halifax House Prices

US: Challenger Job Cuts, ADP Employment Change, Manufacturing ISM, Vehicle Sales and July Construction Spending

China: Mfg PMI, HSBC PMI

Thursday

UK: August Nationwide House Prices, Construction PMI

EZ: Q2 GDP, July PPI, the ECB rate decision and statement (unanimously expected unchanged at 1.00%)

US: Q2 Unit Labor Costs, July Factory Orders and Pending Home Sales

Friday

Japan: Q2 Capital Spending

UK August Services PMI

EZ:  July Retail Sales,

US:  August Non-Farm Payrolls and Unemployment, Non-Manufacturing ISM

China: Non-Mfg PMI, HSBC Services PMI

NB: Monday 6th September Labor Day holidays in Canada and the US.

Conclusion: Expectations Low, But So Is Likely Upside For Risk Assets

 

Keep in mind that behind all of the above is concern about the sectors that started the decline. In 2007 it was the US banks (as the US real estate bubble burst), then in late 2009 the PIIGS and the resulting EU bank trouble. Most of the big banks are in questionable health, and some are just dead men walking. Not surprisingly interbank trust remains low in the EU, cash parked overnight at central banks, top-ranked paper yielding record low rates. We can’t help but feel that we’re just waiting for the next news about which PIIGS nation is in new trouble and which banks are most exposed. Similarly, how long can the US see new declines in employment, spending, and real estate prices before its banks need new assistance?

DISCLOSURE: NO POSITIONS

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