The press advanced the notion that stocks rallied due to the latest GDP reading (third-quarter), which wasn’t as bad as expected; however, the market’s concern has not been what occurred last quarter, but the damage that has been done in the current period. More likely, additional signs the credit markets are returning to something that looks more normal is what helped investor sentiment yesterday.
Market Activity for October 30, 2008
Energy stocks led the benchmarks higher – the index that tracks these shares is up 19% over the last three days – adding another 4% yesterday. Utility, consumer discretionary and industrial shares also performed well – all higher by at least 3%.
The Credit Markets
The credit markets continue to move back to normal, which should give stock-market investors some solace. As we’ve touched on nearly each day lately, three-month LIBOR (inter-bank lending rate for this term and tied to ARMs) continues to decline. Also, the TED Spread, which is a measure of risk-aversion (a wider spread means aversion to risk is high), has narrowed. Although, we’ve seen some flight to the safety of T-bills the past couple of days, thus the spread has halted its decline. But the trend on LIBOR means that this should begin to narrow again.
Further, the Fed’s commercial paper (CP) facility – which they rolled out on Monday – is working well as the CP market is rolling again. U.S. commercial paper outstanding rose $100.6 billion, or 6.9%, to a seasonally adjusted $1.55 trillion for the week ended yesterday. This was the first gain in seven weeks and reverses a 20% decline over the past six weeks.
The Economy
On the economic front, the Labor Department reported initial jobless claims for the week ended October 25 came in unchanged from an upwardly revised reading in the previous week. Claims for unemployment benefits were 479,000 and the number of people remaining on the dole, known as continuing claims, fell 12,000 to 3.715 million.
The four-week moving average – a less volatile measure as it smoothes out weekly disruptions – fell to 475,000 from 480,000.
While the jobless claims figures remain elevated, it is nice to see we’re holding below the 2001 peak. It was also nice to see the ratio of states reporting an increase to those reporting a decrease in claims reversed course. Forty states and territories reported a decrease in claims, with only 13 reporting an increase. This is the inverse of what we saw in the previous week.
Still the October jobs report, which we get in a week, is going to show the largest amount of monthly job losses we’ve seen yet during this 10-month labor-market downturn. The losses for the first eight months of the year were mild, but kicked up in September. We should expect another 100,000-plus loss when that data is released on November 7. If the October data shows a decline of 150,000 payroll jobs, we’ll have lost roughly 10% of the eight million created September 2003-December 2007.
In a separate report, the Commerce Department’s initial estimate on third-quarter GDP showed the economy contracted at 0.3% real annual rate, better than the expected 0.5% contraction.
A positive contribution in inventories added 0.56 percentage point and net exports added 1.13 percentage points partially offseting weakness from residential fixed investment (subtracted 0.72 percentage point) and a large contraction in personal consumption (subtracted a huge 2.25 percentage points).
Take the inventories figures out – what’s known as real final sales – and GDP contacted at 0.8% annual pace. That followed a 4.4% rise in the second quarter. (We were hardly in a recession prior to the credit-market event)
The big news was the 3.1% decline in personal consumption – the most powerful component of GDP. (Don’t confuse this with the number in the previous paragraph. The number above just states the percentage points personal consumption subtracted from the GDP number. This 3.1% figure is the annual rate at which consumption declined) This marks the first contraction in personal consumption since the 1990-1991 recession and is the largest drop since the 1981-1982 recession.
Residential fixed investment (housing) plunged 19.1% in the third-quarter, and marks the 10th straight quarter in which housing has weighed on GDP.
Business spending on equipment and software, which began the quarter strong, shut down as the credit-market disturbance hit – the figure fell 5.5% in the quarter. This more than offset an increase in non-residential structures.
Real imports fell 1.9% and real exports jumped 5.9%, which is why real net exports added nicely to the report. This will not buoy the current (Q4) quarter’s GDP report though as global weakness will hit export orders.
The fourth-quarter GDP report will be the doozie as global weakness will hit exports, inventories will likely contract (inventory levels are low but firms will remain very cautious), consumer activity may remain weak and housing construction will continue to pull-back. Some of these realties are not new, what’s changed since the credit-markets went into chaos in mid-September is the global weakness, likely inventory pull-back and weaker consumer activity. When the current quarter’s GDP number is reported it will likely show a contraction of 3.0-4.0% in real terms at an annual rate – this is in line with the typical economic contraction.
Have a great weekend!
Brent Vondera, Senior Analyst
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