Daily Market Reports | Aug 30 2010
By Greg Peel
So bleak had the most recent US economic data become, particularly housing-related, that Wall Street had talked itself more and more into negative expectations for the first revision of second quarter GDP, which was released on Friday night. Never mind that recent data have been mostly July numbers which form part of the third quarter. And never mind the way the revision process actually works.
The first estimate of Q2 GDP, made last month, takes an April measurement and extrapolates it over three months. That came in at 2.4%. The first revision, released on Friday, adjusts for May numbers and then extrapolates for June as well. The final revision, due next month, will have all the numbers. Note that in April, the stock market was hitting its peak. May saw markets tumble when the European crisis spiralled, and the weakness persisted into June.
Consensus estimates had the first revision measuring 1.4% growth, down from 2.4%, but Wall Street was bracing itself for a number as low as 1.0%. Thus when the result came in at 1.6%, there were cheers all round. It doesn't matter that 1.6% growth is 33% less than 2.4% growth, it only matters that the number wasn't quite as bad as had been feared.
The result sent the stock indices on a steady climb upwards in the session. But Wall Street also readied itself for what Fed chairman Ben Bernanke might have to say in a speech from Jackson Hole, with some expecting that having previously announced quantitative easing measures would be continued but not expanded, this time Bernanke would be forced to announce expansion.
It wasn't to be. Realistically Bernanke simply reiterated what he has been saying over the past month or so, that is: “Should further action prove necessary, policy options are available”. He qualified the trigger for further action as being a “serious deterioration” in the US economy, but suggested that “the pre-conditions for a pick-up in growth in 2011 appear to remain in place”.
So basically Bernanke was saying that even if the third quarter might be shaping up to be a bit of a shocker, the Fed still had faith in its original assumption that the US economy would stumble and bumble along a slow growth curve in 2010, and that that is pretty much what's happening.
Indeed, all this talk of double-dip brings back into focus the tired old debate of recession definitions and semantics. For the US economy to fall back into recession on the commonly accepted definition, both the September and December quarters must register negative growth, meaning we wouldn't even be able to call a double-dip having occurred until the end of the March quarter 2011 when all the data have been collated. However, one assumes that were the September quarter to show a negative number, the double-dippers will claim that as confirmation enough.
But then you could also say that given the last three quarters of GDP have shown growth of 5.7%, 3.2% and now 1.6%, that is quite a dip in itself. Or you could point to the more respected National Bureau of Economic Research economic growth measure, which although being quite backward looking has not yet shown the US economy to be out of recession, let alone heading back into one.
Who honestly cares? If it feels like a recession, it is. The world's biggest chip-maker Intel on Friday revised down its third quarter revenue estimates given weak orders, only a month after having reported Q2 and guided for Q3. Obviously there is no sign of any meaningful reduction in the unemployment numbers. The real question is to whether or not an accurate assessment of the state of the US economy is or is not already built into stock prices. A large cohort of commentators is calling for another leg down in the infamous September-October period, but then when everyone starts to have the same view…
The Dow closed on Friday up 164 points or 1.7% to 10,150. The S&P gained 1.7% to 1064. While the relief rally would have been somewhat supported by a group of genuine buyers, the sudden turnaround smacked of short-covering. Let's face it – 1.6% growth is no Nirvana, and Bernanke really had nothing new to say. Volume was a little better than it has been lately, but at one billion turnover on the NYSE was still light.
Bernanke did rather catch out the bond market. The alleged “bond bubble” had been further fueled last week by expectations the Fed would indeed announce further quantitative easing measures, despite record low yields. So when none were forthcoming, there was a bit of a bail-out. The benchmark ten-year yield jumped a full 17 basis points to 2.65%. That's a huge jump in one session.
As more emergency currency talks are about to proceed in Tokyo, the US dollar index only dipped slightly on Friday to 82.74. But the Aussie risk indicator shot up 1.2 cents to US$0.8990, again indicating plenty of traders being caught on the short side.
Oil and base metals all jumped 1-2%, but perhaps the real story of the night was told by gold, which was virtually steady at US$1238.10/oz. Really, nothing much had changed.
The SPI Overnight jumped 41 points or 0.9%.
Today and tomorrow see the final two days of the Australian reporting season. Thereafter, all goes quiet. But there is a mountain of economic data across the globe to absorb this week to provide more potential fuel for the double-dippers.
On the GDP front, India will report its second quarter number tomorrow, and Australia on Wednesday (consensus expectation 0.9% up from 0.5% in March), and the eurozone will revise its previous estimate on Thursday (consensus expectation unchanged at 1.0%).
It's global PMI week, with Japan releasing its manufacturing number tomorrow and all of Australia, China, the UK, EU and US following suit on Wednesday. Having moved to coordinate manufacturing PMI releases, the world appears to have now done the same for the services PMI, with everyone above bar Japan releasing that figure on Friday. Friday is also unemployment day in the US.
Aside from GDP and PMIs, Australia sees business inventories and new home sales today, building approvals, private sector credit, retail sales and the second quarter current account on Wednesday, and the monthly trade balance on Thursday.
In the US, tonight sees personal income and expenditure, and Tuesday brings the Case-Shiller house price index, the Conference Board measure of consumer confidence, the Chicago PMI, and the minutes of the last Fed meeting (albeit one assumes they are now somewhat redundant).
On Wednesday it's construction spending and vehicle sales along with the manufacturing PMI and the ADP private sector unemployment number, Thursday sees pending home sales, chain store sales and factory orders, and Friday sees non-farm payrolls and the services PMI.
The UK markets are closed tonight for the August bank holiday and the ECB will make a rate decision on Thursday and leave it alone.
There's a raft of important data out in Japan this week but initial attention will be focused on the aforementioned emergency currency meeting called by the Bank of Japan today, which may well result in intervention to curb a soaring yen.
And let us not forget that we are still awaiting an election result in Australia, and may not know the outcome for another week. I originally felt a Labor government was the more likely outcome but the issue has become more clouded given late seats going to the Coalition, polls suggesting support for the Coalition in the independent seats in question, attempts by the Coalition to harass the Three Amigos as much as possible, a National MP in WA who wants to sit on the cross benches, a possible split among the Three Amigos, the demand from the Greens for a cabinet position, and a whole new raft of demands from independent Andrew Wilkie.
You tell me. But for another week it would seem, we will still be in limbo with regards to the MRRT and the NBN.
For further global economic release dates and local company events please refer to the FNArena Calendar.
