U.S. stocks rallied in the afternoon session, erasing a 1.7% decline that occurred right off the bat, as transportation and industrial shares turned mid-day on lower oil prices. A late-session move in financial shares also helped the indices advance. Speculation that Lehman may have found a buyer boosted those shares.
As the chart below illustrates, the S&P 500 jumped 3.1% from the session’s nadir, which had the index below the July 15 multi-year low just 30 minutes into trading.
Oil hit the $100 per barrel handle, closing the day at $100.97 and the Dollar Index ended above 80, which is a level I’ve been looking to as an escape from the danger zone – hopefully we hold onto this rally.
One has to assume oil and gasoline prices will rise from here as Hurricane Ike is headed for Houston, meaning it will track through the western edge of Gulf of Mexico production infrastructure and halt a lot of refinery operations.
Market Activity for September 11 2008
On Lehman, the news has changed a bit from yesterday afternoon as it is now being reported the Fed and Treasury are assisting the search for a buyer of the securities firm. At the top of the list, reportedly, are Bank of America, Barclays and HSBC. Supposedly, the government will not provide financial assistance, thankfully; if they get involved in one more deal we may have to start learning French.
This situation is not like Bear Stearns as Lehman is a much smaller firm and other firms have gone out of their way to say they continue to trade with Lehman. It is far from the Fannie/Freddie situation as those were government sponsored organizations. Further, the money markets don’t seem quite as worried this time around as volatility remains more mild as witnessed by the Ted Spread – the price difference between three month futures contracts for U.S. Treasury bills and three-month LIBOR (rate at which banks can borrow from one another). In short, the spread is a measure of risk aversion. A higher reading means investors and banks run for safety and a lower reading means risk-aversion has waned.
The spread has widened, but as you can see not nearly as much as prior events during this whole mess.
On the economic front, the Labor Department reported that initial jobless claims fell 6,000 to 445,000 in the week ended September 6. The four-week average, which removes volatility, remained statistically unchanged at 440,000.
The level of claims remains elevated for the seventh-straight reading (above 430,000 during this stretch) and since the past couple of readings remain at these levels we can no longer blame the increase on the government’s plan to extend benefits – which increased the number of people available for claims and extended the period one can remain on the dole.
As a result, we should expect monthly job losses to remain in the 60,000-85,000 range, but we’ll need the next two weeks worth of claims data to have an appropriate feel for how the September job losses will turn out.
(I will repeat a comment made last week. When viewing the chart below keep in mind that civilian employment is 12 million stronger than it was 10 years ago and 32 million stronger than it was 20 years back. So not only do claims remain below the levels of the last two recessions, but adjusted for the increase in jobs it’s even lower. The current level of claims is obviously unwelcome news, but we feel the need to provide some context in light of the hysterical comments we all hear.)
In a separate report, the Labor Department reported that import prices fell 3.7% in August (that’s on a month-over-month basis) and decelerated to 16% on a year-over-year basis from a 17-year high of 21.6% in July.
A couple of things:
First, it is obviously good to see the figure decline – which was expected as we discussed yesterday on oil’s plunge from its peak and dollar strength. The petroleum products segment of the report declined 12.8% in August.
However, the ex-petro reading was not much changed on a year-over-year basis from the previous reading, up 7.5% vs. 8.0% for July. Further, industrial supplies ex-petro and ex-total fuels (two separate components) were essentially unchanged from the previous reading as well. The first is up 22% YOY and the latter 19.8% on the same basis. Those numbers were 23.3% ands 20.3% in the July report.
Point is I personally remain concerned inflation has become embedded and this data – in addition to others we’ve cited over the past couple of months – may suggest costs in areas outside of energy have not come down much. Overall, the decline in energy is very helpful, but we’ll have to wait for the September reading to get a better overall picture.
I believe my thought on inflation is a minority view, but I just see too much data that gives me question -- the NABE price survey (large business), the NFIB price survey (small business), the Cleveland Fed’s Trimmed-Mean CPI (which does not just arbitrarily take out food and energy but 16% of the most volatile components), core intermediate good within the producer price index and the ISM and NAPM price indices (manufacturing sector) all give me concern on the inflation front.
In another release, the Commerce Department stated the trade gap widened in July to $62.2 billion from $58.8 billion in June. In real terms, the trade gap still widened, although it has narrowed significantly over the past year. Real exports rose 2.0% in July as imports increased 2.2%.
For all of those who desire a narrower trade gap, we’ve often cautioned be careful for what you wish – the U.S. trade gap narrows during times of economic weakness. A wider gap shows U.S. growth is hitting on all cylinders as imports outpace exports.
The nominal (not adjusted for prices) trade gap will narrow big time when the August reading is released, reflecting a large decline in oil prices. The real trade gap may not change that much.
Today we have another morning of big data releases as August producer prices, retail sales and business inventories for July come out at 7:30CT.
Have a great weekend!
Brent Vondera, Senior Analyst
As the chart below illustrates, the S&P 500 jumped 3.1% from the session’s nadir, which had the index below the July 15 multi-year low just 30 minutes into trading.
Oil hit the $100 per barrel handle, closing the day at $100.97 and the Dollar Index ended above 80, which is a level I’ve been looking to as an escape from the danger zone – hopefully we hold onto this rally.
One has to assume oil and gasoline prices will rise from here as Hurricane Ike is headed for Houston, meaning it will track through the western edge of Gulf of Mexico production infrastructure and halt a lot of refinery operations.
Market Activity for September 11 2008
On Lehman, the news has changed a bit from yesterday afternoon as it is now being reported the Fed and Treasury are assisting the search for a buyer of the securities firm. At the top of the list, reportedly, are Bank of America, Barclays and HSBC. Supposedly, the government will not provide financial assistance, thankfully; if they get involved in one more deal we may have to start learning French.This situation is not like Bear Stearns as Lehman is a much smaller firm and other firms have gone out of their way to say they continue to trade with Lehman. It is far from the Fannie/Freddie situation as those were government sponsored organizations. Further, the money markets don’t seem quite as worried this time around as volatility remains more mild as witnessed by the Ted Spread – the price difference between three month futures contracts for U.S. Treasury bills and three-month LIBOR (rate at which banks can borrow from one another). In short, the spread is a measure of risk aversion. A higher reading means investors and banks run for safety and a lower reading means risk-aversion has waned.
The spread has widened, but as you can see not nearly as much as prior events during this whole mess.
On the economic front, the Labor Department reported that initial jobless claims fell 6,000 to 445,000 in the week ended September 6. The four-week average, which removes volatility, remained statistically unchanged at 440,000.
The level of claims remains elevated for the seventh-straight reading (above 430,000 during this stretch) and since the past couple of readings remain at these levels we can no longer blame the increase on the government’s plan to extend benefits – which increased the number of people available for claims and extended the period one can remain on the dole.
As a result, we should expect monthly job losses to remain in the 60,000-85,000 range, but we’ll need the next two weeks worth of claims data to have an appropriate feel for how the September job losses will turn out.
(I will repeat a comment made last week. When viewing the chart below keep in mind that civilian employment is 12 million stronger than it was 10 years ago and 32 million stronger than it was 20 years back. So not only do claims remain below the levels of the last two recessions, but adjusted for the increase in jobs it’s even lower. The current level of claims is obviously unwelcome news, but we feel the need to provide some context in light of the hysterical comments we all hear.)
In a separate report, the Labor Department reported that import prices fell 3.7% in August (that’s on a month-over-month basis) and decelerated to 16% on a year-over-year basis from a 17-year high of 21.6% in July.
A couple of things:
First, it is obviously good to see the figure decline – which was expected as we discussed yesterday on oil’s plunge from its peak and dollar strength. The petroleum products segment of the report declined 12.8% in August.
However, the ex-petro reading was not much changed on a year-over-year basis from the previous reading, up 7.5% vs. 8.0% for July. Further, industrial supplies ex-petro and ex-total fuels (two separate components) were essentially unchanged from the previous reading as well. The first is up 22% YOY and the latter 19.8% on the same basis. Those numbers were 23.3% ands 20.3% in the July report.
Point is I personally remain concerned inflation has become embedded and this data – in addition to others we’ve cited over the past couple of months – may suggest costs in areas outside of energy have not come down much. Overall, the decline in energy is very helpful, but we’ll have to wait for the September reading to get a better overall picture.
I believe my thought on inflation is a minority view, but I just see too much data that gives me question -- the NABE price survey (large business), the NFIB price survey (small business), the Cleveland Fed’s Trimmed-Mean CPI (which does not just arbitrarily take out food and energy but 16% of the most volatile components), core intermediate good within the producer price index and the ISM and NAPM price indices (manufacturing sector) all give me concern on the inflation front.
In another release, the Commerce Department stated the trade gap widened in July to $62.2 billion from $58.8 billion in June. In real terms, the trade gap still widened, although it has narrowed significantly over the past year. Real exports rose 2.0% in July as imports increased 2.2%.
For all of those who desire a narrower trade gap, we’ve often cautioned be careful for what you wish – the U.S. trade gap narrows during times of economic weakness. A wider gap shows U.S. growth is hitting on all cylinders as imports outpace exports.
The nominal (not adjusted for prices) trade gap will narrow big time when the August reading is released, reflecting a large decline in oil prices. The real trade gap may not change that much.
Today we have another morning of big data releases as August producer prices, retail sales and business inventories for July come out at 7:30CT.
Have a great weekend!
Brent Vondera, Senior Analyst
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