Weekly Economic and Financial Commentary

Clawing Our Way Back

Mon, Jun 29 2009, 06:45 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

Vote:

Vote up:7
Vote down:0

U.S. Review

Clawing Our Way Back

We have often noted the road to recovery would be long and arduous. The most recent batch of economic data supports that notion. Better news in one area continues to be tempered by setbacks elsewhere. This week’s pleasant surprise was durable goods orders, which showed more strength and breadth than expected. That gain was offset by mixed data on home sales and a rebound in unemployment claims.

We still expect the recession will end this summer. Second quarter real GDP likely declined at close to a 3 percent annual rate, with most of that drop coming from a plunge in inventories. Third quarter real GDP is expected to rise solidly, with a rebound in motor vehicle production and slight improvement in consumer spending providing much of the boost to output. The largest boost to third quarter GDP, however, will come from a reduced pace of inventory liquidations.

Sales of existing homes rose 2.4 percent, while sales of new homes fell 0.6 percent in May. Sales have stabilized recently and look as though they have bottomed. Even the hardest hit areas of the country are noting some improvement.

Excesses are Gradually Being Eliminated

Even though new homes sales declined 0.6 percent, excesses are being cleared out of the market. Construction has pulled back even more than sales, which has led to a steady decline in inventories. Inventories of unsold homes have fallen by 161,000 over the past year and are now back near the lows seen in the late 1990s, which was before the housing boom began. Of course, there are still plenty of nearly new homes in existing home inventories. Many of these homes have never been lived in and are giving builders stiff competition for the few buyers that are in the market right now.

Personal income jumped 1.4 percent and after-tax income rose 1.6 percent. Disposable income was boosted significantly by the American Recovery and Reinvestment Act. Consumer spending rose 0.3 percent in May. The gain was slightly less after adjusting for higher inflation, with real personal consumption expenditures rising 0.2 percent. That gain follows declines during the previous two months. Real personal consumption outlays are currently running at a 0.5 percent annual rate below its first quarter pace. Even if spending rises by another 0.2 percent in June, the second quarter will still see a slight decline in real consumer outlays. Another gain, however, would set the third quarter up for a solid increase and bolster our forecast for third quarter real GDP growth. The weekly first-time unemployment claims data continue to be the most important real-time information we get on the economy. This past week saw initial claims rise a surprising 15,000 to 627,000 and the previous week’s number was revised up by 4,000. The closely watched four-week moving average and continuing claims also increased. In addition, several states noted that education services accounted for a large portion of recent claims. That last note caused many folks to downplay the increase. The layoffs, however, reflect serious financial strains at private schools, colleges and universities and public schools. These layoffs are real and present a growing threat to the recovery.

The jobless claims data provide us with much of the information needed to estimate nonfarm employment and the unemployment rate. We expect nonfarm payrolls declined by around 420,000 jobs in June, while the unemployment rate likely rose to 9.6 percent. Labor force growth will have more influence on the unemployment rate over the next few months, as recent college graduates join the workforce and teenagers and college students search for summertime jobs. The annual influx often leads to wide swings in the employment and unemployment data, particularly when we are around key turning points in the business cycle.

Global Review

Signs of Global Stabilization

Over the last several weeks, economic developments around the world have shown that the freefall in activity that followed the financial crisis last fall is showing signs of moderation. This week was no exception and purchasing managers in the Euro-zone are beginning to take heart that the worst of this global recession may finally be in the rearview mirror. While the early “flash” readings of Euro-zone Purchasing Manager Indices (PMIs) for June showed a small down-tick for the services component, it also registered a substantial improvement for manufacturing. The composite index for all industries rose to 44.4 from 44.0. This is still below the key “50” level which means the current conditions are still reflective of a period of contraction.

Sentiment is Improving as Global Recession Loses Steam

Euro-zone is now contracting at slower pace and the economy is stabilizing. We estimate that real GDP in the Euro-zone contracted at roughly a four percent annualized rate in the second quarter, which is not quite as bad as the 9.5 percent drop registered in the first quarter. While growth may remain slightly negative in the third quarter, real GDP should start to grow again, albeit at a sluggish pace later this year. Other measures of business sentiment corroborate the story of improvement in the economic picture. In Germany, the Ifo index—a key yardstick for business confidence—improved for the third straight month. While German businesses did not note any improvement in their current assessment, expectations for business performance in the next six months jumped to 89.6, the highest reading since last summer.

French business confidence also increased for the third-straight month in June. President Sarkozy recently announced a roughly €30B stimulus package which includes tax cuts and spending projects to help lift France out of recession. Businesses are not the only ones feeling encouraged; French consumer sentiment also increased in June, marking the fourth consecutive month of improvement for that series. Consumer sentiment is now the highest it has been since March of last year. There is a growing outlook that this global recession is losing steam. Italian business sentiment is also improving, but a recent report suggests that rising unemployment is keeping a lid on wage growth.

Domestic demand is also weak in Japan, where data released this week showed further contraction in imports. May imports fell 3.6 percent. The trade balance showed a ¥222B surplus in May, the second monthly increase. Exports to the U.S. market and Europe continued to decline as did exports to the rest of Asia. While Japan's May exports fell in nominal terms on a seasonally adjusted basis, on a volume basis they actually showed growth. Real export volumes rose a seasonally adjusted 1.8 percent for the month of May after a 1.0 percent gain in April. The current global recession has been as challenging in Japan as it has been anywhere in the world. These recent improvements in export volumes are welcome developments for Japan, where foreign trade is critically important to the health of the overall economy.

Download Full Weekly Economic and Financial Commentary

Published On Mon, Jun 29 2009, 07:22 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

Older Posts:

Advertisement

Legal disclaimer and risk disclosure

Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. 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. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.