Stock Markets End Week Higher Despite U.S. Unemployment Data

By: PaddyPowerTrader

While the U.S. unemployment rated jumper to 9.4% (a high since August 1983), the markets chose to focus on the welcome fall in the numbers actually losing their jobs (-345k versus consensus -520k). They concluded that despite the negative revisions to previous numbers that the pace of decline may be slowing and that elusive bottom may be in sight. As a result stocks finished higher for the third straight week.

Today’s Market Moving Stories

• Overnight Japan’s current account surplus came in at JPY630.5bn, down 54.5% yoy, even though the fall in exports is starting to ease. Exports fell 40.6% yoy, compared to their 46.5% yoy in March. Bankruptcies fell 6.7% yoy in May to 1,203 cases, the first decrease in twelve months. A Nikkei survey of Japanese companies shows that capital investment is seen dropping 15.9% in 2009, the sharpest decline on record. The largest percentage decline previously had been 11.8% in 1993.
• Zhang Wenkui of China’s State Council’s Development Research Centre states “although the economy has bottomed out, it is touching a flat bottom, instead of a V-shaped bottom … the recovery will be very mild and unstable”. Guo Shuqing, the chairman of state-controlled China Construction Bank, said “I think the U.S. government and the World Bank can consider the possibility of issuing CNY bonds in the Hong Kong market and the Shanghai market.”
• The IMF and the BIS (Bank for International Settlements) came out with more structural reports. The IMF report on bank restructuring should be required reading for every policy maker, indeed every citizen with an interest in policy questions. The IMF manages to survey all the main policy options and describes all the main tricks of the trade. The answer? “Essentially, this involves avoiding unnecessary subsidies to debt holders and maximising the economic value created by the restructuring”. However… “We find that there is no magic bullet.” Yet, “A plan subsidising common equity issues and buying back debt is close to optimal”… and possibly at close to zero prices.
• Spain is setting up a €9bn support fund for banks. The help is modest, but at least it is for Cajas. PM Zapatero said that the government will support smaller Cajas. The EBRD is set to announce a financial support package for Swedish banks, on the back of the Latvian (wider Baltic woes) to which they are massively exposed.
• A significant change of view from one Fed member - and very much in line with a big talking point of the last few months. Janet Yellen (a voter this year) said she preferred to see inflation average 2% in the long run as opposed to the 1.5% that she’d previously advocated. The point Yellen made is critical - she said that when inflation is very low, and hence interest rates are very low, then when a growth shock comes along there is very little room for manourvre. A higher inflation rate would provide some space. She said “recent experience raises the possibility that the great moderation is behind us, so we must be prepared for substantial shocks.”
• The Semiconductor Association has downgraded its 2009 global chip sales forecast to -21% from -5.6% yoy. In April, sales fell 21% yoy. The data portends protracted weakness in Asian exports.
• U.S. consumer credit contracted by $15.7bn in April (consensus: -US$6.0bn) after a downward-revised -$16.6bn in March, the largest decline on records. Elsewhere the U.S. NBER head Hall said it is “way too early” to say the economic contraction is over.
• Those pesky U.S. mortgage rates are still on the rise. Bankrate.com says average 30 year mortgage rates have risen to 5.65%, up 41 basis points in just the past two weeks. And crude oil is around $70 barrel. These are not the kind of headwinds you want to be facing as a consumer while deleveraging in the aftermath of the largest ever asset bubble implosion.
• Professor Robert Shiller, one of the big authorities on U.S. house prices, said prices will continue to fall for some time, and after that, they may not recover for many years. House price cycles take a long time unlike stock market adjustments, which happen instantly, as people sell houses due to economic necessity. The dynamic of rising unemployment and foreclosures helps to explain why housing recession can be long lasting.
• Forgoing those little luxuries. confessions of a TARP wife.
• A job for our times, Lear jet repo man!

Unemployment Numbers Show More Weeds Than Green Shoots
The May labour data inspired two interpretations - one focusing on the smaller than expected number of payroll jobs lost and the other on the obvious overall impression of a depressed labour market. The reduced number of payroll job losses was spread over most industries. The key exception was in manufacturing where -156k jobs were lost and aggregate hours worked plunged 2.7%. The labour department’s birth/death model came in for some criticism as it added more jobs than in prior May’s. The household survey had no green shoots. The unemployment rate surged more than expected and the pool of available workers swelled beyond 20 million. Markets will focus on the Fed’s anecdotal beige book on Wednesday, which should be less grim, and a few key economic releases. Retail sales (due Thursday) should rise by 0.6% in May boosted mainly by stronger auto sales and rising gasoline prices. Higher oil prices will also boost the net trade deficit slightly in April. So how will it play out? Well there potential second half 2009 scenarios fro the US economy are presented in today’s WSJ.

An interesting aside on the unemployment numbers from CNN. “There were also 9.1 million people who were working part-time jobs because they could not find full-time work or they had their hours cut back. This was also a record high. When counting people who wanted full-time work who are working part-time, as well as some of the people who are not counted as unemployed because they had stopped looking for work, the so-called underemployment reading rose to a record level of 16.4%! What’s more, the average work week slipped again to a record low 33.1 hours. That pushed average weekly wages down as well during the month.

Barclays Dealing BGI To Blackrock
Barclays has announced that it was in discussion with a number of parties including Blackrock and Bank of New York Mellon about the sale of both iShares and Barclays Global Investors (BGI). iShares was eventually sold to CVC Capital Partners for $4.4bn in April but the discussions regarding BGI are still said to be ongoing. A decision is set to be announced this week and media reports suggest that if Blackrock did succeed, Barclays were likely to take a stake of up to 20% in the US group. Blackrock are said to have the equity and debt financing in place following discussions last week with Middle East sovereign wealth funds. Any deal is set to exceed the record $8.5bn takeover of Merrill Lynch’s investment management business by Blackrock in 2006, with a figure of $10bn-$13bn being mooted in media reports. A sale of its fund management business for a record figure would be taken as a strong positive for the group in their efforts to avoid any further government investment.

More Bad News For Airlines
Airline stocks are under pressure this morning on revised forecasts of industry losses from the IATA. In a short 10 weeks since its last profit forecast, the IATA has moved to double its estimate to a loss of $9bn on sales of $448bn. Moreover, airlines face a massive bill of about $25bn on the delivery of 800 jets this year, continuing its cash consuming ways. One wonders how long it takes equity investors to lose patience with an industry that habitually destroys shareholder value? Expect more calls for Government bail-outs and mergers. In the mean time some airlines will tap shareholders (note Air Berlin last week) for money to continue their forlorn ways while ignoring the importance of industry lowest costs.”

And Finally… Compare And Contrast
GM simply still don’t get it while Bud are getting risque.

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

© 2009 Copyright PaddyPowerTrader - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.