Weekly Economic and Financial Commentary

A Whole Month of Halloween

Mon, Nov 3 2008, 08:34 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

A Whole Month of Halloween

After the month we have had, Halloween should not scare anyone. The financial markets have been exceptionally turbulent and the economic data have been extremely disappointing. Real GDP declined at a 0.3 percent annual rate in the third quarter and it looks like a recession is underway. The current quarter looks like it will be substantially weaker and the pace of layoffs and unemployment rate are both expected to increase.

October marked one of the worst months ever for the financial markets. Through yesterday’s close, the Dow Jones Industrial Average was on pace to be the worst month since and MSCI World index is on pace to have its worst month ever. Short-term funding markets, including the commercial paper and Eurodollar markets, seized up for much of the month and only have recently shown signs of thawing somewhat.

While the economic data have not been anywhere near as apocalyptic as the financial data, they do show considerable weakness. Real GDP declined in the third quarter and consumer confidence and factory output both plummeted in October.

Consumers Are Clearly Rattled

The Consumer Confidence Index plunged 21.8 points in October, falling by its largest magnitude and to its lowest level ever. Consumers’ assessment of both current economic conditions and expectations for future economic conditions both plummeted during the month and nearly four times as many households expect business conditions to worsen during the next six months than expected them to improve. Consumers are also increasingly pessimistic about future employment prospects, with just 7.4 percent expecting more jobs to be created and a whopping 41.5 percent expecting fewer jobs to be created.

Consumers’ pessimism about current and future economic conditions means consumers are unlikely to ramp up spending anytime soon. September’s numbers were downright awful, with nominal outlays falling 0.3 percent and inflation-adjusted spending falling 0.4 percent. October’s decline marks the third drop in the past four months and puts real consumer spending down at a 3.1 percent annual rate over the past three months. The latest consumer confidence figures show that buying plans plunged in October, which means spending likely dropped again that month.

Continued weakness in consumer spending is bad news for the overall economic outlook. Real GDP declined at a 0.3 percent annual rate during the third quarter and our latest forecast has real GDP declining at around a 3 percent annual rate during the current quarter. Not only will the current quarter be considerably weaker than the prior one but the weakness also appears to be far more broad based, including not only weakness in consumer outlays but also cutbacks in business fixed investment, exports and state and local government spending.

Along with the weaker consumer confidence data, most of the other early data for October show that economic weakness has intensified. First-time claims for unemployment have continued to inch up to the high 400,000 range. The weekly numbers have been disrupted by weather-related distortions and the extension of unemployment claims. There is no disputing the recent trend, however, which has been solidly and consistently upward. Claims remain at a level consistent with the onset of past recessions and layoff announcements have increased in recent weeks.

The only good news reported in recent weeks has been on the inflation front. The personal consumption deflator rose just 0.1 percent in September and was unchanged in August. Gasoline prices have plummeted in recent weeks, which should lead to even tamer readings on inflation in October and November.

Global Review

Lifelines Thrown to Developing Countries

In our weekly report last Friday we discussed the extraordinary volatility in emerging market currencies that has arisen due to increasing fears of a global recession and a mad scramble for dollar liquidity. This week, steps taken by the International Monetary Fund and the Federal Reserve stopped the run on most emerging market currencies, at least for now.

First, the IMF announced this week that it would lend $16.5 billion to Ukraine and $15.7 billion to Hungary. (Additional loans from the World Bank and the European Union bring the overall size of Hungary’s package to $25 billion). The IMF’s actions this week follow its $2.1 billion loan to Iceland last week.

The IMF went even further this week by announcing a new program dubbed the Short-Term

Liquidity Facility (SLF). Loans extended to Hungary, Iceland and Ukraine will follow “traditional” IMF guidelines. In return for the loans, the respective governments will take steps (e.g., tighter monetary and fiscal policies) to reduce imbalances (e.g., inflation and excessive current account deficits) in their economies that usually result in short-term economic pain. However, there are many developing countries with sound macroeconomic fundamentals that have seen their currencies hammered during the current liquidity crunch. The SLF will allow those countries to borrow from the IMF on a short-term basis to address liquidity issues without making unnecessary policy adjustments.

In support of the IMF, the Federal Reserve announced this week the establishment of $30 billion swap lines to Brazil, Korea, Mexico and Singapore that are authorized until April 30, 2009. The swap lines allow central banks in those countries to borrow dollars from the Fed to help meet acute short-term dollar funding needs in those countries. Following the announcement, the Korean won, which has been battered over the past few weeks, strengthened more than 15 percent against the greenback (see top chart). The Brazilian real (middle chart) and the Mexican peso (bottom chart) also clawed back some lost ground this week.

The steps taken this week by the IMF and the Fed are yet another indication, if any more are needed, that policymakers understand the dire implications for the global economy if the global credit crunch continues. The extraordinary programs announced by governments in many countries over the past few weeks should eventually ease strains in credit markets. Even Japanese policymakers got into the act this week when the Bank of Japan announced a 20 basis point reduction in its main policy rate. (The BoJ cut its target for the overnight interbank rate from 0.50 percent to 0.30 percent.)

Indeed, financial market tensions appear to be easing somewhat. The 3-month U.S. dollar LIBOR rate, which spiked up to 4.82 percent on October 10 when credit market were completely frozen, ended this week at 3.03 percent. Although LIBOR rates, which serve as important benchmarks for other short-term interest rates, remain elevated relative to where they “should” be, are moving in the right direction.

Download Full Weekly Economic and Financial Commentary

Published On Mon, Nov 3 2008, 09:32 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

More Reports from this Contributor

Archive

The Moderate Economic Recovery is Still Underway
Fri, Feb 10 2012, 19:23 GMT
Off to a Good Start for the Year in US; Europe Agrees on Fiscal Pact; Manufacturing Improves
Fri, Feb 3 2012, 20:08 GMT
Less Strength Than Meets The Eye
Mon, Jan 30 2012, 05:24 GMT
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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