After the worst start to a September ever, equity markets are getting some back this morning with a moderate bid to open the day. Bonds are giving back some of their recent gains, but remain solidly in the bull market camp. The dollar is also declining and oil is getting a bid. In other words, the risk-on trade is back this morning.
The yield curve has been a conundrum this year. The curve (see chart below for 2-10 curve) is technically still steep, yet the economy is slowing. With short term rates effectively zero the question is whether the curve is still relevant for predicting the economy or not? Should we assume a more “normal” level of short rates? If so, then is the curve flat or even inverted? If we make that assumption, it certainly supports the slowing economy and possibly even a recession scenario. One thing is certain-whether we are in a recession or not, the jobs picture is exceptionally difficult with 4.5 job seekers for every opening.
Yesterday the ISM Services index came in better than expected at 53.3. Expectations were for 51.0, and July’s measure was 52.7. New orders accelerated from July and order backlogs improved. The Business Activity/Production index decelerated from 56.1 to 55.6, and the employment index also decreased.
Bank stocks, especially Bank of America, have been weak since fears about Europe and the US economy reemerged in the spring. Bank of America’s stock has been more than cut in half over that time period, with a temporary respite after garnering an investment from Warren Buffet. Yesterday the company shook up the executive suite, replacing Sallie Krawcheck, who ran wealth management, and Joe Price, who ran retail banking. The stock is up today, to $7.25.
Yahoo also added to the list of unemployed CEO’s yesterday as they fired Carol Bartz. She has been temporarily replaced by CFO Tim Morse. Although the stock is getting a nice bid this morning, my guess is that until the board decides to replace itself, very little will change at the company. Remember, this is the same board that went to great lengths to fight off a takeover bid from Microsoft at $35 (the stock is now $13).
Yesterday Russia turned on their $10 billion Nord Stream pipeline, which links Russia’s natural gas supply to Western Europe. The pipeline, which is expected to be at full capacity sometime next year, will provide enough natural gas for 26 million homes. Russia gets it. Europe gets it. Maybe someday the US will get it?
Speaking of the economy, the Administration instructed the EPA to back down on environmental rules that, were they to go into effect, would have shuttered a large percentage of US electrical generation. The White House initially blocked the rules in 2009, and has now pushed them out to 2013 for another administration to deal with (or possibly his own, but when he isn’t facing reelection). “When the White House makes an announcement the Friday before a holiday weekend, you can bet that it won’t be anything in which they take special pride,” from the blog an Economist Democracy.
Word has been leaking out of the White House for the past two weeks about potential topics for the President’s jobs speech tomorrow night. This morning word of a $300 billion tax package, primarily driven by tax cuts, infrastructure spending, and direct aid to state and local governments hit the wires. The tax cuts will probably come in the form of an extension of the 2% reduction in the payroll tax and a possible cut in the portion paid by employers. The President threw down the gauntlet to Republicans in a speech Monday, saying “You say you’re the party of tax cuts? Well then, prove you’ll fight just as hard for tax cuts for middle-class families as you do for oil companies and the most affluent Americans.”
APAC markets were up strong yesterday with the Nikkei up 2%, Kospi 3.8%, ASX 200 2.7%, Hang Seng 1.7%, Shanghai 1.8%, and the Sensex 1.2%. European markets are also strong this morning, up over 2% across the board.
The GOP conducts their second debate of the 2012 election tonight from the Regan Library in Simi Valley.
Have a great day
Ned
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