The economic data the past two days was in general negative as the CPI came in at 3.6% vs. expectations of 3.3%, with the core measure at 1.8% vs. expectations of 1.7%; initial jobless claims moved back above 400K to 408K; existing home sales declined 3.5% vs. an expected increase of 2.7%; and the Philadelphia Fed Manufacturing Index fell to -30.7 vs. an expected increase of 2.0. The index of leading economic indicators was up 0.5% vs. an expected increase of 0.2%. Combined with negative news out of Europe and a downgrade of the economy by Morgan Stanley, who is predicting a US recession, and the markets were rocked yesterday. When the Philly Fed (see chart below) has registered a reading of -20 or less, we have always been in a recession.
As investors fear another recession, a flight to safety has been occurring as the US 10-year broke the 2% mark for the first time in 60 years, even though it is no longer AAA rated. The dollar is also rebounding this morning. Lower quality bonds, BBB and below, have begun experiencing a backup in rates as investors are more risk adverse. This is usually a signal equities will continue to experience pressure.
In a bit of quid pro quo, the US Justice Department is probing of both Moody’s and S&P over their ratings of mortgage-backed securities. I find it ironic that eight years after the first batches of really poor securities were rated AAA, only now, just two weeks after a downgrade of US debt, does the Justice Department decide to investigate.
Hewlett-Packard is looking at a number of downgrades last night after their earnings announcement, which was accompanied by an announcement the company would be spending $10.3 billion for UK based Autonomy, a software developer. Additionally, the company announced plans to exit the hardware business by spinning off its PC division, and will focus on software and services in an attempt to look more like IBM.
Storage maker NTAP announced weaker than expected earnings on Wednesday night. Notable in their report were comments that all six of their financial services companies didn’t buy a single product in the quarter.
APAC markets were rocked last night as investors continue to fear a global recession. The ASX fell 3.5%, Nikkei 2.5%, Kospi 6.2%, Hang Seng 3.1%, Taiex 3.6%, and Shanghai 1%.
Despite record low mortgage rates, residential lending activity is the lowest in 15 years. Homeowners have been unable to refi due to too much leverage in relation to plummeting home values.
According to The Economist, among the Group of Seven countries only Germany’s per-capita GDP has returned to its pre-crisis levels. The US is still 3.5% lower than in 2007. The chart below shows the per capita increase in GDP of various countries since the market topped in Q4 2007. China’s has increased by 35%.
France has eased its short selling ban as index-future traders were concerned about what to do as their contract expired. Some traders are suggesting that US banks suffered as a reaction to the moratorium in some European countries on shorting financial institutions. There was a rumor coming out of Europe yesterday that a single bank borrowed 500 billion Euro overnight at 1%, well in excess of standard overnight lending rates. The concern obviously is that this institution is in so much trouble they were willing to go outside normal channels to ensure their capital base.
Equity futures are down slightly this morning.
Have a great weekend.