Daily Market Reports | Feb 22 2008
By Greg Peel
The Philadelphia Fed index of economic activity is considered somewhat of a bellwether for the US in general given the number of factories in the region. Economists were shocked in January when the index fell to -20.9 from +1.6 in December. The Dow responded by falling 300 odd points. So steep was the decline that many suspected the reading may have been something of a furphy. As such, consensus had the February figure rebounding to -10.
But February came in at -24, as released last night. This confirmed the January figure as accurate, and moreover suggests economic activity in the region is indeed in recession.
The release took the wind out of the sails of what had seen like perhaps an attempt at stabilisation on Wall Street. Yesterday the Dow ended in positive territory despite a worse than expected CPI result. Last night the Dow opened up 76 points ahead of the Philly release, but then it turned tail. It was not a dramatic fall – more a slide of lost interest on low volume. It just goes to show how different 2008 has become compared to 2007. The Philly news heightens the possibility of another Fed rate cut in March which, although relatively well expected, had been thrown into some doubt on increasing inflation numbers. In 2007 any thought of a rate cut would have sent the Dow skyward. But after so many cuts, with no result, it doesn’t seem to matter anymore. Fed rate cuts will no doubt help the US economy out of its slow-down, but only after it has already slowed down.
The Philly index result was the worst since February 2001, at which point the US was about to go into recession. But even more ominous was the “index for future activity”, which fell to -16.9 from +5.2 in January. Even with January’s huge fall in the present tense index, the survey showed the outlook to still be slightly positive. But no more. February’s is the lowest reading in 28 years. And 1990 was a precursor to another recession. Just to add the icing, the Conference Board (national) index of leading economic indicators fell by 0.1% in January, its fourth consecutive fall.
The Dow closed down 143 points or 1.1%, a little off the low of -180 hit a half hour before. The S&P lost 1.3% and the Nasdaq 1.1%.
Over in France, SocGen announced a US$4.9bn loss for the fourth quarter, for which one Jerome Kerviel will get most of the blame. SocGen’s fourth quarter result in 2006 was a profit of US$1.9bn.
The Dow was held up to some extent by a better performance from the tech stocks therein, which in turn was sparked by a very strong profit result from Blackberry vendor Research in Motion. GM took a hit as it announced job losses in its troubled finance arm, while the two big oil stocks – Exxon, and index newcomer Chevron – saw profit-taking as oil finally fell.
It seems the triple top has been formed in the oil price. It’s a bit spurious, as last night we rolled into the April contract which closed yesterday at US$99.70/bbl to March’s US$100.74/bbl. So we had to factor in US$1.04 on the forward curve before April fell US$1.47 last night to US$98.23/bbl. The fall came as yet another weekly inventory report showed a build. This is the current conundrum – inventories are building as demand is falling, particularly from consumers less willing to pay up for gasoline. All US economic indicators are looking recessive, yet oil has been pushing higher on geopolitical tensions and refinery outages. What’s going to give? It could be that oil is delicately perched over quite a yawning chasm.
The US dollar fell last night on the Philly news, which adds to expectations of a March rate cut. The bond market had a particularly wild session. The bond curve had been rising and steepening (in yield) on inflation concerns until last night’s Philly number. That number signals a rate cut, so in theory the curve should shift down again, which it did. But it did so rather rapidly, given the market had been very much setting up its inflation plays. However, it pulled back again just as rapidly as the inflation players regained control, and steepened further. The twos closed down 15bps and the tens 12bps.
Gold rushed up once more to trade over US$950/oz. A rate cut and inflation concerns are both gold positives. However, when oil turned around profits were taken, the end result being a US$1 fall to US$944.60/oz.
Base metals, however, exploded to the upside (London closed with gold on its highs, oil not yet weak). Copper was up 3.4% and aluminium up 2.1% to both hit 21-month highs. Zinc rose 5.6% and nickel 4.1%. Lead was up 1.8% and tin 1.7%, the latter close to all-time highs. The CRB commodity index hit a 20-year record high.
The SPI Overnight was down 55 points. Most significantly, the March contract SPI (which is the ASX 200 future) pushed down to close right on the support level of 5500 where it set up camp. The deck chairs were erected in order to have the best viewing position to see whether the physical index will emphatically break through that support today. The futures market’s next move will then become more clear. But then again, the ASX 200 could bounce this level as decisively as it did yesterday. It looks like hedge funds trying to push it down versus some big buy programs happy to soak it up. This is a must-see event.
