The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Succinct summation of week’s events:

Positives

1)Oct payrolls surprise big to the upside 2)Fed lights another fire under asset prices but are we really wealthier as a result? 3)Emerging markets continue to rally as investors seek non $ assets 4)Oct auto sales rise to best since Sept ’08 ex clunkers 5)ISM services and mfr’g indices both above forecasts 6)RBA and RBI raise rates to cool inflation pressures 7)Fed to allow healthy banks pay dividends.

Negatives

1)Huge printing of money has turned our central bank into a 3rd world one 2)Asset priced induced wealth effect is an illusion if a debased currency and higher inflation is the side effect 3)Deeper the Fed gets, the more difficult it will be to reverse 4)Commodity inflation as measured by CRB index rises to 2 year high 5)Ireland, Portugal and Greece financial concerns continue to grow 6)German Sept factory orders fall sharply 7)Sept Pending Home Sales unexpectedly fall.

Succinct summation of week’s events:

Positives

1)Private sector job gains about line with expectations 2)Initial Claims fall below 450k 3)Aug Pending Home Sales better than expected 4)ISM services rise more than estimated but components mixed 5)Purchase apps at 5 mo high 6)For asset prices at least, BoJ will buy anything, Bernanke hints at more QE 7)For sound money, BoE and ECB stay put 8)Strong Australia jobs # 9)Shanghai index at 5 mo high 10)China likes Greek debt, Greek 10 yr below 10% for 1st time since June

Negatives

1)QE consequence, CRB index at 2 yr high, message to Fed: Be Very Careful What You Wish For 2)$ index lowest since Jan, Brazil/South Korea take step toward capital controls 3)Fitch downgrades Ireland credit rating 4)Sept private Payroll gain modest, U6 at 17.1%, matches 9 mo high 5)Refi’s fall to 8 week low 6)ABC confidence at 8 week low 7)Sept Canada jobs # falls

Succinct summation of week’s events:

Positives

1) For asset prices at least, Fed VC Dudley hints at more action, CRB RIND up 14 out of 15 days to record high
2) PIG debt rallies sharply as Ireland quantifies bank rescue’s and Portugal gives budget details
3) Less than expected maturing ECB funds rolled into new facilities
4) Chinese PMI mfr’g indices both rise more than expected and Shanghai index at 2 week high
5) Q3 Japanese Tankan mfr’g survey rises 7 pts 6) Initial Jobless Claims lower than expected

Negatives

1) Fed VC Dudley hints at more action, commodity inflation growing, $ index lowest since Jan and gold at record high
2) ISM falls to lowest since Nov ’09
3) MBA said refi’s fell to 7 week low even as mortgage rates fall to new low
4) Conference Bd Consumer Confidence falls to lowest since Feb
5) House votes to slam China’s currency policy and implicitly threatens trade war.

Initial Jobless Claims were much better than expected at 451k vs the forecast of 470k and down from 478k last week (revised up by 6k). Labor Day weekend may have had an impact on the seasonal adjustment but we’ll have to see next week to what extent. Either way though, the market will take a downward move to the lowest since early July in light of the worrisome rise over the past month. Continuing Claims were above expectations but little changed with the prior week while Extended Benefits were up a net 30k. Also giving a boost to the futures was the less than expected July Trade Deficit of $42.8b vs the est of $47b which may lead to a boost to economists Q3 GDP estimate of as much as .4 of a % point as exports rose 1.8% while imports fell by 2.1%. In contrast, trade was a big drag on Q2 GDP.

Succinct summation of week’s events

Positives

1)Initial Jobless Claims 17k less than expected at 473k and down from 504k last week
2)ABC confidence at 6 week high, UoM confidence slightly weaker than expected but up a touch from July
3)Q2 GDP better than feared but still weak
4)Bernanke elaborates, doesn’t lower ’11 GDP forecast and stops for now at QE1.5
5)Refi’s rise to most since May ’09
6)Ireland has good bill auctions, albeit very short term maturities
7)German IFO highest since June ’07, consumer confidence highest since Oct ’09
8)UK retail index strong
9)Housing stocks and INTC shrug off bad news and AAII has bulls at lowest since Mar ’09.

Negatives

1)CDS and yields in PIIGS moving higher again
2)Italian consumer confidence lowest since Mar ’09
3)Existing and New home sales awful
4)Durable Goods weak with non defense cap goods ex aircraft down 8%
5)PC sales slowing.

With the cost of bank bailout fears flaring up again last week in Ireland combined with a weaker than expected drop in Q2 GDP in Greece, and general risk aversion seen in the rally in Treasuries and Bunds after the FOMC meeting and weak US economic data, Greek asset prices are again pointing to trouble. This week the Greek 2 yr yield at 10.71% has risen 60 bps, is higher by 120 bps over the past 2 weeks and is approaching the 10 yr yield of 10.77%. Greek 5 yr CDS is at 895bps, up 75bps on the week and 140bps in two weeks. It now exceeds Argentina again and is now only below Venezuela. What is most worrying about the action in their 2 yr is that the EU has in place a 3 yr 110b euro bailout package for Greece, fully covering all of their debt obligations during this time. The market clearly has worries still that a debt restructuring is the inevitable outcome. Greek stocks closed down on the day 3.5% to a 4 week low.

The stock markets of the 2 most economically influential countries in the emerging world, China and India, have modestly broken out. The Shanghai index closed higher by .8% to a 3 month high and the Indian Sensex index traded higher by 1.1%, closing at the highest since Feb ’08. Copper in response is at a 2 week high. European stocks are higher after the Bundesbank raised its ’10 GDP estimate to 3% from 1.9% after the strong Q2 report. July retail sales in the UK were above forecasts. Combining these 2 items with a higher than expected July PPI # in Germany has European bonds modestly lower and Treasuries are following. With 20 yrs of malaise, a Japanese newspaper is saying the BoJ may expand further a credit program and they are still evaluating the economic impact of a stronger yen. From Jan ’03 to Mar ’04, the BoJ spent 35T yen (about $320B) intervening and it failed miserably and the experience will influence what the BoJ may or may not do.

Succinct summation of the week’s events:

Positives 1)UoM and ABC confidence bounce a touch off multi month lows 2)Chinese economic data mixed at best but reduces odds of more tightening and raises hopes for soft landing

Negatives 1)US retail sales, trade deficit, and jobless claims weaker than expected and Q2 GDP may be revised to 1-1.5% 2)CSCO repeats ‘unusual uncertainty’ theme of Bernanke 3)Mortgage apps not responding to historically low mortgage rates 4)Chinese economic data mixed at best 5)Southern European sovereign debt worries arise again as yield spreads and CDS widen out, and last but certainly not least 6)Fed policy, panic and inability to allow the business cycle to work without interference.

Succinct summation of week’s events:

Positives

1)Shanghai index closes up on the week and near highest since May on goldilocks theme 2)JoC index of 18 industrial materials also at highest level since May 3)Good #’s from European banks, RBS, Lloyds, BCS, BNP and HSBC 4)Greece gets high 5 from IMF and EU 5)ISM mfr’g and services indices better than expected 6)Savings Rate at 6.4% rises to one yr high 7)Fed may continue to purchase assets,

Negatives

1)Fed may continue to purchase assets, enough already, the strategy isn’t working and Fed policy over the past 10 yrs is a disaster 2)July Payrolls disappoint 3)ISM mfr’g and services indices below the 6 month avg 4)ABC confidence matches lowest since Oct ’09 5)June Pending Home Sales unexpectedly drop even after sharp decline in May 6)June income and spending below forecasts 7)Rising commodity prices and potential inflation impact 8)Weaker Chinese mfr’g data

Initial Jobless Claims totaled 464k, 19k above expectations and up from a revised 427k last week. The distortion of the seasonal auto shutdowns that didn’t happen at GM combined with the July 4th holiday has made the initial claims portion of the data too cloudy to analyze week to week and we thus should average the prior couple of weeks. The 4 week average is 456k, just shy of the lowest since late May but still remains very elevated for an economy that is this far into a recovery. Continuing Claims fell a sharp 223k but comes after rising 276k in the week prior. Extended Benefits fell a net 368k after a fall of 278k in the week prior and 345k the week before. This sharp drop has been more due to people falling off the rolls because of the expiration of benefits. With the extension likely to be reinstated up to 99 weeks, this trend should reverse as the labor market still remains lackluster.