Daily Market Reports | Jul 03 2009
By Greg Peel
The Dow closed down 223 points or 2.6%. The S&P fell 26 points or 2.9% to 896. The Nasdaq fell 2.7%.
It was a very unusual day on the NYSE for two reasons. Firstly, for some reason history shows the market almost always closes stronger ahead of the Fourth of July. Down days are rare, and a 2.6% down day is virtually unprecedented. But that’s all by the by. The other unusual factor was that due to a computer glitch earlier in the trading session, in which orders were held up, the NYSE decided to extend trading to 4.15pm. This was slightly unfortunate, given the market was ending on a weak note, and the extra 15 minutes added about another 30 points to the fall in the Dow.
The session was dominated by one data set and one alone, being the monthly unemployment stats, which was released before the opening bell. The Dow fell about 150 points on the open and stayed that way almost all session, as slowly the trading floor emptied as operators headed off on their long weekend. Not only was there almost no one around to conduct the extra session, the computers had automatically shut off at 4pm. Those remaining at their posts had to scramble to remember just how one conducts trading by writing paper tickets, just as late selling hit. No doubt this didn’t help.
Wall Street was positively shocked in May when only 322,000 Americans lost their jobs – a far cry from the 700k plus number recorded in January and a lot less than expectation. It was hoped this result meant the pace of unemployment growth was slowing, consistent with other “green shoot” data. Economists thus pencilled in a loss of 325,000 for June. The ADP private number, released on Wednesday night, threw the cat amongst the pigeons with a 473,000 fall, but still only had economists shifting up to a 350,000 consensus expectation.
The result of 467,000 thus came as a negative shock. There are now a record 14.1 million Americans out of work. There was a little bit of grace provided by the unemployment percentage, which came in at 9.5% – 0.1% higher than May but 0.1% lower than expectation. Nevertheless, this is the worst rate in 25 years. What’s worse still, the average number of hours worked per week fell to only 33, implying those who do have a job have had their working hours trimmed. Average hourly wage growth was flat, suggesting wages might be going backwards by July – a significant indicator of deflation.
Wall Street had been in sideways mode over June, waiting for confirmation that early signs of a slowing in the pace of economic contraction would be followed up with continuing positive results. The market is, after all, up some 40% on this expectation. Resolve has begun to wobble of late, however, and this jobs report clearly did little to raise hopes further. Wall Street responded sharply.
Does this mean “green shoots” have all been a mirage? Not necessarily. The US has a strange double-tiered unemployment benefit system, in which someone who loses their job receives only 26 weeks of immediate benefits, but receives a benefit commensurate with the pay they were on. When this stops, the still jobless either give up and revert to living off capital, or join the dreaded social security system. Either way, these people are not registered as looking for work, and thus not registered as “unemployed”.
What thus transpires is someone off the register for some time may see opportunity emerging – green shoots – and decide to go back on the register as looking for work. Hence they add to the “unemployed” number once more. This is one reason why unemployment numbers always lag the end of a recession by a good deal. A turnaround in economic fortunes brings more “unemployed” out of the woodwork. Economists thus pointed to recent green shoots as being a possible reason why the June result was as bad as it was.
But whichever way you look at it, the number of out-of-work Americans is growing, and those without a job do not spend money and struggle to make mortgage payments. It is too early to suggest there will be a crisp “V” bounce out of recession.
As a result of this latest scare, risk aversion again returned. This means the US dollar index yet again bounced back over the 80 mark in the index. It has flip-flopped around 80 now for several weeks. Gold was sold off as a result, and as a result of deflationary indications, falling US$11.70 to US$928.60/oz. The Aussie dropped a sharp one and a half cents to US$0.7941.
The US dollar was undeterred by the European Central Bank’s decision to leave its cash rate on hold at 1%. Jean-Claude Trichet suggested he was happy with the level of monetary stimulus for now, but did not shut the door on a future rate cut.
For real commodities, the combination of a stronger dollar and weak economic data was not encouraging. Oil plunged nearly 4% or US$2.58 to US$66.73/bbl. All base metals were down 1-2% in London with the exception of nickel, which added 1% despite a big surge on Wednesday. Nickel is the metal of the moment given stainless steel producers have recently noted an increase in demand.
At the end of the day, volume on the NYSE was very light. There were few souls around to stick their hands up on the buy-side. The VIX volatility index, which has recently traded as low as 25, shot back up 6.6% to near 28 as investors again decided put option protection is not such a bad idea in an uncertain world. With inflation now appearing less of a threat than deflation, the ten-year bond yield slipped below 3.5% in the safe haven rush.
The SPI Overnight fell 82 points or 2.1%.
Wall Street is closed tonight for the Independence Day holiday weekend. There will be no Overnight Report tomorrow (Saturday) although relevant prices (eg London metals) will be updated. The Overnight Report will return on Tuesday morning.
To our American readers – Happy Fourth of July.
