Is realism back in fashion on Wall Street and in other parts of the markets?
How else do you explain the ‘bearish’ reaction to data and news flow in the US and Europe over the last week.
Is it fear that profits made from trading and riding the rebound since March, using cheap money from the Fed and other central banks around the world, might be threatened by the still struggling economies?
Those fears were well explained in this analysis from Reuters at the weekend.
After all the same mixed parade of economic figures and surveys have been released in the past couple of days: higher Australian retail sales and property prices; Chinese and Australian manufacturing OK, as was France’s and Germany’s, but America’s surprised by falling a bit, but was still quite solid.
European unemployment in August rose, but the rate of increase slowed; Japanese exports fell and industrial production rose, but at a less convincing rate than expected; European consumer confidence picked up.
But Japanese inflation is non-existent; it’s deflation as consumer prices (excluding food) fell at a record breaking annual rate of 2.4% in the year to August.
Japanese unemployment improved, unexpectedly to 5.5%, as did consumer spending
Personal spending in America rose in August because of the cash for clunkers car scrappage-subsidised boom, which has promptly reversed itself in September with the bailed out giants, GM and Chrysler badly hurt.
US unemployment benefits rose a week ago, but long term jobless numbers eased again, not by much, but enough to continue the slow improvement.
Overnight Monday figures were released showing that the US Services sector (the largest part) was solid in September.
So all in all, situation normal as the US and the world’s other economies continue to struggle out of the slump.
Up to the past week, that flood of figures would have been shrugged off and investors would have powered on chasing share prices higher and ignoring relative valuations and the odd growl of a bear.
But there seems to have been a souring in confidence: US bond rates hit a five month low with the 30 year security falling under 4% and the 10 year bond retreating to 3.22% as investors continued to buy US government debt, in spite of the record amount on issue and being issued.
If the weak sentiment continues into the third quarter reporting season in the US that is now about to start with Alcoa’s results tomorrow night, then Friday’s rotten employment report in America for September will have been the driver.
Those earlier niggling doubts have been converted to concerns. It was a bad report because it was so contrary to what the upbeat analysts had been expecting.
There was simply nothing positive to be gleaned from the report.
US employment fell by 263,000 last month, more than most forecasts, which had the drop under the 200,000 mark.
The US jobless rate ticked up to 9.8% as a result with the participating rate falling 0.3% to 65.2%.
US economists are now starting to believe that employment numbers suggest more and more that there’s nothing there to power the US economy once the stimulus spending wears off (just look at the very sharp fall in September’s car sales after the Cash for Clunkers scheme ended in August).
This view will be tested Wednesday by the release of consumer credit figures for August from the Fed.
July’s showed a record $US21.6 billion fall.
Economists say August will see a $US10 billion fall, but the wildcard is the impact of lending for the cash for clunkers scheme, which will die away from September onwards.
Even the government sector shed jobs in the US in September: education grew because of new hirings for the start of the school year, healthcare kept adding jobs, as it has done for most of the recession.
The average length of the working week dropped back to the record low of 33 hours, as manufacturing hours fell.
Wage growth was again sluggish and likely to fall further as the continuing high levels of unemployment reduce workers’ bargaining power.
The resulting fall in private income means American consumers will have even less with which to spend consuming, especially as the important Thanksgiving-Christmas period approaches.
This thinking has been apparent from the personal spending/consumer credit/employment and wages figures for all of this year, but was ignored as the gains from the rebound got in the way of good sense and judgment.
And the steady erosion of confidence in US banks continues: three more banks were closed by US regulators at the weekend, all small local operators.
That brought the number of failures this year to 98.
Besides Alcoa, results in the US will include quarterlies from Pepsi Co, Monsanto, Costco, Marriott and Family Dollar.
Sales and trading updates will also be issued by a slew of northern hemisphere companies, including a clutch of retailers, such as Sainsbury in the UK, Target, Gap, The Limited, JC Penny and Saks in the US.
But European markets will watch the first half figures and commentary from UK giant, Tesco, to see just what state UK consumers and shoppers are in, and what the retailer’s management sees happening in the next few months.
Tesco is the world’s third largest retailer.
In Europe, the Bank of England and the European Central Bank will both produce rate decisions on Thursday night, Australian time.
Unlike Australia, no change is being forecas
