FYI | Aug 31 2007
By Greg Peel
The second quarter US GDP number came in last night at 4% growth. The first quarter number was 0.6% growth. On any normal planet, that would be seen as “booming”, and one might expect a bit of monetary tightening to be considered. But this is Planet Credit Crunch.
What the market really wanted was a bad number. This seems counterintuitive, as it is a recession the US is fearing, but a bad number would encourage the Fed to cut rates and then, supposedly, the markets would be dragged out of this disaster. For the opposite reason, a really good number would have been bad.
As it was, the number was actually slightly weaker than expected. This is not particularly helpful. And the breakdown became even more confusing as it was the business sector that boomed while the consumer managed only to limp across the line with a 1.4% rise, which continues a falling trend. Average the GDP figures for the first half and you get 2.3% economic growth – at the low end of the preferred scale. Is this enough to force Bernanke’s hand?
Well no one on Wall Street was quite sure. And its all academic, as Bernanke will release a statement tonight from Jackson Hole. The market will be hoping the Fed chairman’s words are unambiguous, and fresh. A repeat of “prepared to act as needed” would only continue the uncertainty and anxiety, one assumes. While the Fed funds futures have already factored in a full 100 basis point cut by year’s end, most commentators expect 25bps only on September 18 as a prologue, and some still feel a cut is not necessarily a given.
Part of the problem is that apart from calming the markets, the discount rate cut of August 17 has achieved little else. Aside from the US$2 billion borrowed by the big four, hardly anybody else has approached the window. The liquidity that is being pumped daily into the system by the Fed, which has pushed the cash rate down to 4.5% (75bps below the target rate) may be keeping the interbank market going but it is having no impact on the real world – the commercial paper market. Commercial paper rollovers fell for the third straight week, down another 5.6%. The money is going into the safe haven of US Treasuries, and not into the perceived risk of the business world. The next step in this trend is a move from liquidity crisis to solvency crisis.
The Dow was down as much as 100 points early last night, but after a choppy session finished down 50 points or 0.4% on light volume. The S&P was also down 0.4% but the Nasdaq managed a 0.08% rally. Tech stocks are seen as the new defensive stock in this market given their truly global receipts.
Adding to weakness was the latest round of investment bank downgrades. Merrills started it on Tuesday and now they’re all at it. Lehman Bros last night downgraded the banks in general, sending the likes of Goldman Sachs, Morgan Stanley and, indeed, Merrill Lynch down on the day. This won’t end until everyone has downgraded everyone else. Spite perhaps? Well, while investment bankers can act like kids in a sandpit at times the fact is downgrades seem surely warranted.
And another weak indicator was the weekly jobless claims figure – the dole queue – which added 9,000 to a total of 325,000 unemployed. Wait till the 50,000 odd mortgage market cast-offs start lining up for relief. Is this enough to force Bernanke’s hand?
And besides, a cut in the target rate may prove more symbolic than practical. The rate is already cut by proxy, given the liquidity being pumped into the system. It’s not going where it’s needed. We still don’t know who’s holding the toxic waste of worthless mortgage-backed assets and how much. Until we do, there can be no trust in financial markets.
The US dollar moved up against the euro and pound last night. The dollar is equally confused, given a rate cut should really mean a sell-off but then also should mean economic stimulation, but the ECB has hinted it won’t be raising now as expected so the currency differential game is a tough one. The dollar fell against the yen, however, sending the Aussie back down to US$0.8156. Gold fell US$2.30 to US$664.80/oz. The ten-year yield slid again, from 4.56% to 4.51%.
Base metals prices were largely steady, and the oil price slipped slightly having posted its big Katrina anniversary gain on Wednesday. That US$1.70/bbl move was put down to our old friend inventories.
The SPI Overnight dropped 19 points.
Bernanke is expected make his statement in the morning of Friday’s session, allowing plenty of time for a market response (and likely volatility). It is the Friday ahead of the Labour Day long weekend. This is the last weekend of the summer break and normally there would be only half a dozen trainees left on the floor of the NYSE in the afternoon. The scene is set.
