March 8, 2010
Strong Economic data bolsters the market The equity markets oscillated back and forth in advance of the unemployment report last Friday. Once it was revealed that the report was not as bad as originally feared, buyers raced in to push the S&P 500 index up 3.1% and the Dow Jones Industrial Average up by 2.3%.
Economic data was largely in line or better than expectations last week. Consumer credit posted a surprise increase of $5.0bln in January, the first such increase since January 2009. Nonrevolving credit, which includes auto and education loans, led the charge with a $6.6bln increase. The increase may be attributable to higher auto financing costs (3.94% versus previous 3.26%) rather than a genuine rise in consumer demand. Revolving credit (credit cards), on the other hand, contracted an additional $1.7bln.
Source: Econoday
The most recent release of the Federal Reserve’s Beige Book confirmed that economic conditions showed signs of expansion throughout the country but labor markets are only showing tentative signs of improvement. The Fed commented that residential real estate activity is picking up, but officials are “apprehensive” about what will happen once the home-buyer tax credit expires at the end of April.
In a possible precursor of future troubles for the US Treasury, UK gilts (the equivalent of US Treasuries) are trading 90 basis points above German government bonds, suggesting that the UK is no longer priced on an equivalent basis with other AAA-rated sovereign credits. By 2011, debt levels as a percent of GDP are expected to 99.5% in the US and 94.1% in the UK based on forecasts from the OECD. More concerning is that interest payments as a percent of GDP will reach 7.4% and 8.7% for the US and UK, respectively.
The UK is unlikely to face roll over risk, though, as the average maturity of outstanding debt is nearly 14 years, a far cry from the 4.8 year maturity in the US. Over the weekend, the Congressional Budget Office (CBO) predicted that President Obama’s most recent budget proposal would increase the US debt load by $9.8trln in the next 10 years. Turning to the corporate sector, Moody’s confirmed that the trailing 12-month global speculative grade default rate slipped to 11.6% in February, down from its near term peak of 12.9% in November. While that is more than double the 5.8% rate only a year ago, Moody’s is now predicting that defaults will be a mere 2.9% by the end of this year as many of the past year’s largest defaults begin to disappear from the calculation. Employment Report digs out from th The much ballyhooed “weather effect” failed to impact last month’s unemployment report, pushing economists predictive power into the same camp as the local meteorologist.
According to the BLS, “in the establishment survey (business surveys), the reference period was the pay period including February 12th. In order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off work for an entire pay period and not be paid for the time missed…workers who received pay for any part of the reference pay period, even one hour, are counted in the February payroll employment figures. While some persons may have been off payrolls during the survey reference period, some industries, such as those dealing with cleanup and repair activities, may have added workers.”
“In the household survey (which surveys actual households), the reference period was the calendar week of February 7- 13. People who miss work for weather-related events are counted as employed whether or not they are paid for the time off.” There you have it.
Digging slightly deeper into the data, it is becoming evident that education is more important than ever. Over the past 12 months, the unemployment rate for individuals without a high school diploma skyrocketed from 13.0% to 15.6%. For those people with at least a bachelor’s degree, the unemployment rate stood at 5.0% against 4.2% one year ago.
Source: Chart of the Day The week ahead George Papandreou, prime minister of Greece, will sit down with President Barack Obama in Washington on Tuesday. The two will commiserate over the excessive levels of debt experienced by each of their respective countries.
Kroger, a behemoth in the US supermarket sector, is one of the few companies left to report 4th quarter earnings this week. On Tuesday, the company will discuss the performance of its more than 3,000 stores, offering insight into consumer shopping trends as the economy is healing.
Economic data is on the light side this week as the January trade balance and February retail sales are the only indicators of major importance. The trade deficit is expected to hold steady around $40.0bln as imports and exports are rising in tandem. Retail sales could fall victim to the “weather effect” following blizzards in the early portion of the month, which shut down malls and kept many consumers trapped in their houses. Last week’s release of the Beige Book, from the Federal Reserve, mentioned that consumer spending was weak because of weather related problems, but spending on lower priced items showed increased demand.
lighter side
Source: Tom Toles
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