Weekly Economic and Financial Commentary

Plenty to Shout About

Mon, Mar 9 2009, 06:21 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

Plenty to Shout About

There has been a whole lot of shouting going on over the past few weeks, as fears about the economy and financial markets are clearly rattling a lot of nerves. There are growing concerns that economic policy is heading in the wrong direction and that the economic stimulus package will be ineffective or even counterproductive. We feel these judgments are a bit premature and overreaching. The economy will eventually recover and the stimulus package will, at a minimum, play at least a supporting role. In the short-term, however, there is clearly more pain ahead.

The big news this week was the February employment report, which showed the economy losing 651,000 nonfarm jobs and the unemployment rate jumping 0.5 percentage points to 8.1 percent. Job losses continue to be incredibly broad-based and previously reported drops in December and January are now shown to be much worse than first reported.

Job losses remain extraordinarily broad based. The diffusion index for nonfarm payrolls was just 23.8 in February and averaged just 22.5 over the past three months.

First Quarter GDP Should be Worse than the Previous Quarter

Average weekly hours have remained unchanged at 33.3 hours for the past three months, which indicates employers are reducing employment rather than simply cutting back hours. Layoffs have been extraordinary, however, with nearly two million jobs lost in just the past three months. With employment plummeting and the workweek unchanged, total hours worked plunged at an 8.8 percent annual rate over the past three months.

The plunge in aggregate hours worked suggests real GDP will decline even more during the current quarter than it did during the fourth quarter. The sum of aggregate hours worked and nonfarm productivity is a good proxy for real GDP growth. Nonfarm productivity declined at a 0.4 percent annual rate during the fourth quarter and increased 2.2 percent over the past year. Nonfarm productivity has averaged a 1.7 percent pace over the past three years and this is probably the best figure to use to compute an interim GDP estimate. Using that figure results in a 7.1 percent decline in first quarter real GDP, which is close to our early bottoms up estimate for our March Monthly Economic Outlook.

Most of this week’s other economic reports also point to an incredibly weak first quarter. Construction spending plunged 3.3 percent in January, with particularly large declines in commercial construction and the formerly strong energy and power sector. Pending home sales and unit car and truck sales also declined, with pending home sales falling 7.7 percent in January. Separately, manufacturers’ new vehicle sales to dealers fell by a half million units to a 9.1 million unit annual rate. Factory orders fell 1.9 percent in January, which was slightly less than expected. The previous month’s drop was revised a percentage point lower, however, and the key non-defense capital goods orders series plummeted 5.7 percent. The weakness in orders and shipments suggests that business fixed investment will decline sharply in the first quarter and probably all of this year.

The only good news this week was that first time claims for unemployment insurance fell 28,000 to 639,000. It was the first decline in four weeks and leaves jobless claims at a historically high level. Continuing claims also declined, falling 6,000 to 5,106,000. Weekly first-time jobless claims are extremely volatile and this past week’s drop probably does not mark a turnaround but rather a slowdown in the rate of deterioration in the labor market. We expect the exceptionally weak employment numbers to persist through the middle of this year and then become progressively less bad during the second half of the year.

Global Review

Central Banks Try to Stem the Tide

After a spate of economic indicators came in worse than expected in recent weeks, central banks across the globe scrambled to ratchet down their already dour forecasts to what appears to be the new grim reality of a bad global recession.

After Canadian GDP fell at an annualized rate of 3.4 percent in the Q4, the Bank of Canada (BoC) cut its key lending rate to a record low 0.50 percent at its scheduled meeting the next day. The BoC acknowledged its global economic outlook had deteriorated since last month’s report “with weaker-than-expected activity” around the world. On the other side of the Atlantic, the Bank of England (BoE) made a similar move, cutting its lending rate to 0.50 percent. In addition, the bank announced a £75 billion plan to buy government and private sector bonds, a move that led to a scant 60 bp drop in the U.K. 10-year government bond yield in two days.

Bank of England Taking a Cue from the FOMC

The BoE had been reluctant to cut rates quickly over the last year even as the Federal Reserve was quick to do so. The rationale for not rushing to bring down the lending rate drastically had to do with the BoE’s mandate to keep inflation near two percent, when last fall year-over-year inflation was over five percent. But inflation -- at a year-over-year rate of 3.0 percent in January -- poses less of a threat. With just about every major economy around the world mired in recession, there is less danger of runaway inflation taking hold. In addition to the problem of slowing growth abroad, there were signs this week that domestic demand in the United Kingdom was falling apart as well. The purchasing managers’ indexes for both manufacturing and the service sector remained in contraction territory in February though the survey for the service sector has begun to show tentative signs of recovery. BoE Governor Mervin King wrote to the Chancellor of the Exchequer noting that in “these highly uncertain times, there are merits to stimulating the economy through a variety of different channels.” By means of this correspondence, the BoE governor sought – and received – authorization to print money and buy financial assets. In remarks following the official announcement Chancellor Darling noted that “America has been doing something like this for several months.”

Across the English Channel, the European Central Bank (ECB) moved to cut its rate 50 basis points to 1.50 percent. The ECB has been the “last one in” in the effort by the world’s central banks to cut rates and provide liquidity to a choked credit market. The situation in the Euro-zone has quickly gone from bad to worse. Data released this week showed that the 16-country economy contracted at a 5.8 percent annual rate in the fourth quarter. It is unclear in what sector any recovery will begin in the Euro-zone. There is little hope for a quick turnaround in manufacturing as the manufacturing PMI is at an all time low. Consumer spending in the Euro-zone is likely to remain against the ropes as unemployment is now over eight percent and consumer confidence is also at a record low. With EU rules forbidding the ECB from buying government bonds, it is hard to imagine the ECB fostering a rally in government bonds as the BoE did this week.

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Published On Mon, Mar 9 2009, 07:54 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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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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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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