Reviewing Last Week's Economy
Markets closed in the red as investors became increasingly concerned about the snowballing of credit-related problems.
Phew! What a tumultuous week! MarketWatch very aptly described the events as "a central-banking version of the old playground poem 'Solomon Grundy'." "Ben Bernanke and company were speculated about on Monday, cut rates on Tuesday, took steps to inject credit-market liquidity on Wednesday, and were scrutinized and debated over on Thursday and Friday."
Sub-prime issues, liquidity and credit crunch concerns continued to cause market jitters, especially as Morgan Stanley (MS) became the first major Wall Street investment house to warn that it may now be too late to stop a recession. And this report, entitled "Recession Coming", came from Dick Berner, otherwise known at Morgan Stanley as the "resident bull." Equally closely watched Nouriel Roubini went one step further, stating that it was time to move away from the soft landing versus hard landing discussion and start concentrating on how deep the coming recession would be.
The past week was characterized by an avalanche of bearish reports. Let's briefly review the market's actions on the basis of economic statistics and a performance chart.
The Fed cut the Fed funds and discount rates by a quarter-point each to 4.25% and 4.75% respectively on Tuesday. Many investors were expecting a larger reduction and were even more perturbed by the Fed's statement citing risks to inflation as well as economic growth rather than concerns about future economic growth.
The Fed's rate cuts were followed by an announcement on Wednesday that the Fed, the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank would make coordinated liquidity injections of as much as $64 bln in the coming weeks in an effort to alleviate the credit logjam. This represents the biggest act of international economic cooperation since the September 11 terrorist attacks, raising concerns that problems in the financial sector and the global economy could be wider than feared.
The latter part of the week witnessed a surge in US inflationary pressures with the PPI (+3.2%) showing the biggest gain in 34 years and the CPI (+4.3%) jumping to a two-year high.
The usual summary by Gold Seeker of the week's economic reports was not available at the time of going to print, but Yahoo Finance came to the rescue with an excellent table of economic statistics.
Week's Economic Reports
Click here to enlarge.
Source: Yahoo Finance, December 14, 2007.
The coming week's economic highlights, courtesy of Northern Trust, include the following:
- Housing Starts (Dec. 18): Permit extensions for new homes fell by 7.2% in October, marking the fifth monthly decline in 2007. This declining trend suggests continued weakness in the construction of new homes. Starts of new homes are predicted to have fallen to an annual rate of 1.05 mln in November versus 1.229 mln in October. Consensus: 1.18 mln.
- Real GDP (Dec. 20): Real gross domestic product is expected to be left unchanged at 4.9%. Consensus: 4.9%.
- Leading Indicators (Dec. 20): Interest rate spread, initial jobless claims, consumer expectations, the real money supply, and stock prices made negative contributions. Vendor deliveries and the manufacturing workweek made positive contributions. The net impact was a 0.3% decline in the leading index during November after a 0.5% drop in October. Consensus: -0.3%.
- Other reports: Survey of National Home Builders Association (December 17), Federal Reserve Bank of Philadelphia's Factory Survey (December 20) and University of Michigan Consumer Sentiment Index (December 21).
The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.
Click here to enlarge.
Source: Wall Street Journal Online, December 16, 2007.
Global stock markets experienced a rollercoaster week, but closed in the red as investors became increasingly concerned about the snowballing of credit-related problems and central banks falling "behind curve."
The Dow Jones World Index declined by 3.2% and emerging-market stocks by 3.0% (incorrectly reported on the chart above). Interest-rate-sensitive and smaller-cap stocks were big casualties of deteriorating investor sentiment. The Indian BSE 30 Sensex Index (+0.3%) was one of the few to escape the onslaught.
The US Dollar Index continued to strengthen during the week, spurred on by the Fed's more-hawkish-than-expected statement. Higher-yielding currencies, in general, rose on the announcement of central banks' plans to flood the system with cash.
Global bonds declined across the board as the spotlight fell on inflation, negating earlier safe-haven considerations. On the money-market side, one-month dollar and sterling Libor rates fell somewhat in response to the central banks' announcement. Euro Libor rates, however, edged up as Eurozone inflation picked up the pace.
The stronger dollar and mounting concerns about a US recession weighed on the prices of copper (-5.4%) and other base metals (-4.1%). The precious metals complex had a mixed week with only platinum (+1.0%) making some headway.
Crude oil (+3.4%) ended the week higher as continued harsh weather conditions impacted much of the US and a refinery fire also added to supply problems.
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