Weekly Economic and Financial Commentary

The Only Thing We Have To Fear...

Mon, Nov 12 2007, 10:21 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

The Only Thing We Have To Fear...

Fear has taken hold of the financial markets and shaken any semblance of common sense investors had left. Share prices sold off sharply this past week, first on news that General Motors would take a stupendous $39 billion loss in the third quarter and then later on the announcement of another round of write-downs related to the subprime mortgage market meltdown. To make matters worse, oil prices flirted with the psychologically important $100 a barrel level throughout most of the week and earnings from tech bell weather Cisco Corporation came in short of expectations. In addition, chain store sales came in below expectations for October.

Given all of this negative news there is little wonder that investors did not take too kindly to Fed Chairman Ben Bernanke's testimony to the Joint Economic Committee Thursday morning. The stock market initially sold off as investors interpreted Bernanke's testimony to mean that the Fed was finished cutting interest rates. Share prices recovered later in the day, however, as investors seem to have come to

… Is Rising Oil Prices, Subprime Mortgages, And The Dollar
the conclusion that there was very little new information in Bernanke's testimony. The notion that the Fed sees risks both to economic growth and inflation should come as no surprise. Inflation will almost certainly accelerate in coming months as the weaker dollar boosts the price of imports and higher oil prices filter through the economy. Economic growth will also likely slow during the current quarter, but only after third quarter growth is revised even higher. This week's stronger wholesale sales and inventory data along with this morning’s trade data, suggest that third quarter growth may be a full percentage point higher, nearly five percent.

Our most recent forecast was released on Wednesday and we still do not see a recession lurking around the corner. Real GDP growth in the current quarter should rise at around a 2.5 percent pace, even with another 20 percent plus drop in residential construction and only sluggish growth in consumer spending. While some analysts have been quick to jump the gun and declare that the U.S. economy is already in recession, we continue to believe such talk is foolish. Growth will most certainly slow over the next two quarters but we will see growth.

The biggest news this week was the stronger-than-expected third quarter productivity numbers, which showed nonfarm productivity climbing at a 4.9 percent annual rate. The gain was the largest in four years and brought the year-to-year change in nonfarm productivity growth back up to 2.4 percent, which is in line with its average for the past five years. Stronger productivity growth should help contain core inflation in coming months and will provide the Fed a little more breathing room to concentrate on offsetting the drag from the collapse of the subprime mortgage market.

Other major economic reports released this past week include a much larger than expected gain in both wholesale sales and inventories, which rose 1.3 percent and 0.8 percent respectively. Even if sales slow, there is plenty of room for inventories to rise, which should provide some downside protection to growth.

Weekly first-time unemployment claims also posted a surprising drop of 13,000 claims in early November. The better than expected unemployment data is a sign that conditions are stronger than widely believed outside the housing and mortgage finance sectors. With exports rising solidly, we think there is a good chance GDP growth will once again surprise us to the upside in coming months.

Global Review

As shown in the chart at the left, the dollar continued to get pounded this week. Comments by a Chinese official regarding the country’s foreign exchange reserves, which total an incredible $1.4 trillion, were one of the catalysts for this week’s sell-off (see top chart on page 4). The official said that China should favor strong currencies, which appeared to be a (not so?) subtle knock against the rapidly declining greenback. His comments helped to send the euro to yet another all-time high against the dollar. The official subsequently said he did not mean the Chinese government should buy more euros at the expense of dollars, but the damage had already been done.

We have argued in the past that the Chinese government is not likely to dump its holdings of dollar assets. Mass selling of dollar securities would cause the greenback to tank and long-term interest rates to spike. The resulting financial market carnage could easily throw the U.S. economy into recession, an outcome in which China has little interest. A U.S. recession would lead to slower economic growth in China and softer labor market conditions. Rising unemployment has the potential to lead to social instability, which the government wants to avoid at all costs. Therefore, we view the probability of outright liquidation of U.S. assets by the Chinese government to be rather low.

Another pressing policy concern in China is the rise in inflation this year (see middle chart). Most of the run-up in the overall CPI this year reflects sharp increases in food prices. However, food makes up one-third of the Chinese CPI (the comparable figure in the United States is only 15%), so core CPI inflation could rise if workers demand higher wages to compensate for lost purchasing power. One way to help rein in inflationary pressures is currency appreciation, which helps to constrain import prices. As shown in the bottom chart, the pace of renminbi appreciation has picked up recently. Indeed, the Chinese currency strengthened 0.5% this week, the fastest rate of appreciation since the currency was revalued by 2% in July 2005. An added benefit to Chinese policymakers of faster currency appreciation is that it helps to keep Washington, which has been carping about the undervalued renminbi for years, off of their backs.

Are there any implications of euro appreciation for the Euro-zone? The biggest policy concern at the European Central Bank at present is inflation. Although the ECB opted to keep its main policy rate unchanged at 4.00% this week, ECB President Trichet said “the outlook for price stability over the medium term is subject to upside risks”. Will the ECB, which has been on hold since June hike rates again? We think not. Growth is slowing, and slower economic growth should cause inflationary pressures to dissipate.

Would the ECB cut rates to relieve the upward pressure on the euro versus the dollar? The ECB does not have a target for the exchange rate, so it would not ease policy simply because of the euro. If, however, currency appreciation leads to slower-than-expected growth and/or declining inflation, then the ECB would contemplate a rate cut. We do not believe the ECB is at that point yet. Rather than easing policy, the ECB might undertake currency market intervention if the euro should continue to strengthen.

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Published On Tue, Nov 13 2007, 10:50 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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Good News on Manufacturing, Inflation and Housing
Fri, Jan 20 2012, 20:12 GMT
Week Two Brings a Little Less Enthusiasm
Mon, Jan 16 2012, 06:17 GMT

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There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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