The Economy: U.S. Freezes, Europe Eases
In the runup to the widely anticipated (or should we say dreaded) U.S. employment report for February, scheduled for release Mar. 6, investors received a bit of not-quite-as-bad-as-expected news—which is what passes for good news these days on Wall Street—on the labor market on Mar. 5. First-time claims for unemployment rose by a lower than expected amount in the final week of February. The market is anticipating that the February employment data will show that the U.S. economy shed a total of 630,000 jobs as the recession deepened.
Traders on Mar. 5 also weighed some not-quite-as-bad-as-expected figures on factory orders, but a worse than expected revision to fourth-quarter productivity. Meanwhile, policy moves by the European Central Bank and Bank of England were also on the market's radar, and experts continued to puzzle out the future direction of the fragile U.S. stock market.
Here are the thoughts of some Wall Street analysts and economists on those topics, as compiled by BW staff on Mar. 5:
Beth Ann Bovino, Standard & Poor'sU.S. jobless claims were down 31,000 at 639,000 for the week ending Feb. 28, smaller than the 650,000 that markets expected and somewhat encouraging. Continuing claims fell 14,000 to 5,106,000 the previous week, though after surging 122,000 to a record 5,120,000 (upwardly revised from 5,112,000). The insured unemployment rate held at 3.8%.
While the headline was a little bit better than expectations, though still at elevated levels, [markets will remain] focused on Friday's payroll report. We expect 625,000 jobs lost in February.
Ted Wieseman, Morgan Stanley (MS)Factory orders fell 1.9% in January, a sixth straight drop for an unprecedented 24% annualized collapse over this period but a somewhat smaller than expected decline than in recent prior months. A bounce in prices helped nondurable goods orders rise 0.5% (the upside was more than accounted for by a rebound in petroleum refiner shipments) after a run of severe recent declines. The overall durables component was revised up to -4.5% from -5.2%, but underlying details were weaker, with nondefense capital goods orders, the key core gauge, revised down from already extremely weak results in both January (-5.7% vs. -5.4%) and December (-5.8% vs. -5.9%). There were only minor offsetting revisions to weak results for overall nondefense capital goods shipments in January (-6.7% vs. -6.6%) and December (+0.1% vs. 0.0%). The underlying breakdown was worse than expected, however. As a result, we cut our forecast for first-quarter equipment and software investment to -28% from -26% and overall business investment to -26% from -24.5%. Meanwhile, overall factory inventories were revised down to -1.9% from -1.4% in December, pointing to a further downward revision to fourth-quarter growth but a smaller inventory drag in the first quarter. We now see fourth-quarter growth being revised down to -6.7% from -6.2% instead of to -6.5%, but this should result in a somewhat smaller inventory drag in the first quarter, offsetting the more negative path for investment.
Michael Englund, Action EconomicsProductivity in the nonfarm business sector dropped at an annual rate of 0.4% in the fourth quarter, revised from a 3.2% rise initially reported a month ago. The market had expected a revision to 1.6% based on the downward revision to real GDP reported last Friday. The new data contain the benchmark revisions to the accounts, which resulted in a further downward revision to output and a small upward revision to hours. Productivity remains up 2.2% from a year earlier; the data are very volatile on a quarterly basis. For 2008 as a whole, productivity rose 2.7%, the largest rise since 2004, because of fewer hours worked. Unit labor costs jumped 5.7% in the fourth quarter, but are up only 1.8% from a year earlier, in line with the core CPI. There may be some worries about inflation as a result of this report, but they are premature.
Colin Ellis, Daiwa SecuritiesThe ECB today lowered the main refinancing interest rate to 1.5%, in line with expectations … In the accompanying press conference, President Trichet set out the ECB staff's latest projections, which are now for a contraction in GDP of around 2.7% in 2009, with growth near zero in 2010. The inflation projections have also been revised down significantly—CPI inflation is now expected to be around 0.4% in 2009, and around 1.0% in 2010. Trichet emphasized that the Council's own forecasts may be less pessimistic, and that it does not underwrite the staff projections. But we think that, if anything, these latest staff projections are still too optimistic.
The Bank of England today decided to cut [its benchmark] Bank Rate to 0.5%, its lowest level on record. However, more notable was the decision to shift to a policy of quantitative easing (QE). The arrangements for QE have now been spelled out in letters exchanged between the BoE and the [British] Treasury. The BoE now has the authority to buy up to £150 billion of securities in total, of which up to £50 billion should comprise the types of private sector assets agreed under the [asset purchase facility (APF)], financed by the creation of central bank reserves—in effect, by printing money … No one knows just how potent this new policy will be. Our one concern is that by focusing so heavily on gilt purchases from financial institutions who may simply hoard the cash, the impact of this increase in the money base might be muted. The BoE may yet be forced to consider an even bolder approach, bypassing the banking system altogether and providing direct support to households and firms.
Sam Stovall, Standard & Poor'sThe S&P Investment Policy Committee lowered its yearend target for the S&P 500 to 850 from 1025, indicating a 6% projected decline for the year. We believe the S&P 500 is getting close to a bottom in both price and time, yet should experience another leg down before the bear market has ended. With EPS likely to begin recovering in late 2009, and optimism for a more meaningful rebound expected in 2010, we see investors beginning to shed their bear skins after midyear. However, as a result of the sentiment damage that needs to be repaired, we believe the S&P 500 share-price recovery will be sluggish and drawn out.
Philip Roth, Miller TabakWe get inured to the regular rise in trading activity, so much so that the average NYSE composite volume for the first two months of 2009 of 5.699 billion shares per day seems unremarkable. The 2008 average was 4.960 billion, so the increase was "just" 15%. But average volume increased greatly over the course of 2008. The first half of 2008 registered an average of "just" 4.221 billion shares. What we forget (or didn't know) was that 4.221 billion daily average was a record at the time. The first two months of 2008 averaged 4.341 billion shares. Hence, volume in the first two months of 2009 was up 31% year-over-year. As a result, turnover (volume divided by shares listed) is running at an annual rate of over 220%.
The last time turnover was this high was in the first decade of the 20th century. Interestingly, we see similarities. In the period from the end of the Civil War to World War I there was little ordinary public participation in the equity markets and there were no traditional institutions, like mutual funds and pension funds, in the equity markets. Stocks were dominated by big speculators and pools. Sound familiar? We believe very high trading activity and very high volatility are factors suppressing investment activity and expect those measures to subside prior to new sustained demand from the public and traditional institutions. Traders (read: hedge funds) may start an advance (short covering, for example), but it takes investors to sustain one.