Daily Market Reports | Mar 15 2008
By Greg Peel
On Friday the European Union CPI figure for February came in at 3.3% – up from 3.2% in January and the highest figure recorded since EU numbers began being collated in 1997. Over the month of February and into March, the euro has hit record highs against the US dollar, easing the European currency effect of rising commodity prices, particularly for oil.
Last week the Melbourne Institute Australian consumer inflation expectation figure for March came in at 4.6%, up from 4.5% in February. Official figures are recorded quarterly, and the December quarter CPI reading was 3.0%, up from 1.9% in September. Similarly, Australia has enjoyed at least some relief from rising commodity prices due to its surging currency.
Last week the Chinese CPI for February showed an increase to 8.7% from 7.1% in January. The Chinese currency is pegged to the US dollar, leaving China with little relief from rising commodity prices.
On Friday the US February CPI was announced as an annual figure of 4.0%, down from 4.3% in January. The monthly change in the headline CPI was 0% against an expectation of a 0.2% rise. The monthly change in the core CPI was 0% against an expectation of a 0.3% rise. The energy component fell 0.5% in February, while the oil price rose from US$91.75 to US$101.84/bbl over the period. The commodities component was down 2%, while the CRB index rose 14% in the month.
A few wood ducks actually believed this number, and the Dow rose as much as 48 points on the open before sanity prevailed. The index then fell 300 points.
A flat CPI conveniently provides the Fed with indemnity to cut the cash rate heavily next Tuesday.
Two years ago, the US Federal Reserve decided to stop publishing the M3 money aggregate – a figure which gives an indication of just how much paper money the central bank is printing. Its excuse was that credit markets now made a measure of M3 irrelevant. No one believed that either.
If the US CPI number really is correct, then it is a “quirk”. On that basis it will adjust very heavily to the upside in the March figure. Most official US economic data are guess-and-giggle affairs anyway, and substantial revisions are made up to two months later. But whatever one chooses to believe about the February CPI, the fact of the matter is it was quickly forgotten.
On Friday there was a “run” on investment bank Bear Stearns. Shares in the stock fell 47% from an already shattered position. Before the credit crunch hit last year, shares in Bear Stearns – the firm that set it all in train when it announced two of its hedge funds were in trouble – were trading close to US$160. On Friday they closed at US$30.
The investment bank’s primary lender – JP Morgan Chase – was forced to make an emergency appeal to the Fed for temporary support on Bear Stearns’ behalf. As an investment bank only, Bear Stearns has no direct line to the lender of the last resort.
On Thursday, the CEO of Bear Stearns appeared on CNBC to assure all that the company was perfectly healthy and its liquidity position was sound. In so doing he made the same fatal error many a CEO has made before him. Smiling reassurance is the kiss of death. The CEO of junk bond specialist Drexel Burnham tried that one Thursday in 1990. By the Monday Drexel Burnham was gone.
Order has broken down on Wall Street and chaos now reigns. Readers who understand options trading will appreciate that put options in Bear Stearns traded at 700% volatility on Friday. A strike worth US25c on Thursday traded at US$9.00 on Friday. And on Thursday, when at least two days of rumours had dogged the investment bank, thousands of well out-of-the-money puts were purchased by someone unknown. Then Bear’s primary lenders pulled their support and set the collapse of the investment bank in train.
The Fed is acting as we speak in coordination with JP Morgan. The fate of Bear Stearns will possibly be decided over the weekend. Given the gravity of this development, today’s (Saturday in Australia) Overnight Report will be brief. An updated report and more detail will be provided by Monday morning.
On Friday the Dow fell 194 points or 1.6%, recovering from an intraday low of -313 points. The S&P closed down 2.1% and the Nasdaq 2.3%.
Gold rose US$7.30 to US$1001.50/oz.
Oil fell US12c to US$110.21/bbl.
The Aussie dollar fell 85bps to US$0.9372 over 24 hours.
Base metal prices closed unsubstantially mixed amid the confusion.
The SPI Overnight fell 36 points.
