US consumer credit jumped in June by
$13.2bn versus the $5.8bn expected and Q207 unit labour costs rose by
2.1% against the forecast 1.8%. Q207 non-farm productivity fell by
more than expected and to nobody’s surprise, the FOMC left interest
rates at 5.25%. America’s largest luxury-home builder, Toll
Brothers, announced that 3rd quarter revenues had dropped by 21%, which
added to the adverse investor sentiment. Despite the very volatile
week, with huge swings for the major indices, the Dow ended higher by
0.4%, whilst the S&P 500 and the NASDAQ rose by 1.4% and 1.3%
respectively.
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Turning to Europe, worries about the state of the credit markets were
reignited when the largest French commercial bank, BNP Paribas,
announced that it had closed three of its funds to new business and
redemptions, citing the ‘complete evaporation’ of liquidity. It
said that valuation of the $2.8bn of funds. allegedly 30%+ exposed
to US mortgages, would resume as soon as liquidity returned to the
market. Euro-Zone June retail sales advanced by 0.9% annualised
against the 1.4% expected, whilst in the UK June industrial production
came in as expected at 0.8%.European bourses fell hard during the week,
led by the banking sector and by week’s end the UK FTSE 100 had lost 3%
with the French CAC 40 and German Dax, lower by 2.7% and 1.2%..
Out East, the OZ central Bank raised its benchmark interest rate by a
quarter to 6.5%, the highest in 11 years. And China faces the risk of
faster inflation, according to its Central Bank (which has presided over
double digit credit growth for years) as July money supply rose by 18.5%
year on year. The Nikkei fell by 1.3%, whilst the Hang Seng gave up
3.3%.
On the currency front, the $US index gained 0.6% to 80.7 on a trade
weighted basis, whilst US Treasury yields rose. The 5 and 10 year yield
were higher by 1.2% and 1.6% respectively, ending the week at 4.57% and
4.78%.
Within the commodities complex, the $crude oil price fell by 5.3% over
the week to $71.5 a barrel, whilst the. $Gold price eased by 0.4%,
ending the week at $673oz
Next week sees the release of the latest “important” inflation data,
CPI, for the US, the UK and the wider Euro-Zone, whilst Q207 GDP stats
are released for the EU and Japan. The latest trade balance figures are
also due out for both Japan and the US, with the latter also announcing
June advance retail sales and July industrial production numbers.
It was only a few months ago that US Treasury Secretary, Hank Paulson,
the Fed and other Central Bankers’ gave “assurances” that the US
sub-prime mortgage woes were relatively minor in size and would be
contained. It hasn’t quite worked out that way with an estimated
$140-$180BN “liquidity” injected into various economies this week, by
their respective Central Banks, in an endeavour to ease overnight
interest rates, which had spiked higher. Central Banks can “create
liquidity” without limit, since there are no constraints on them since
the Gold Standard was abolished over 30 years ago, but whilst it is one
thing to create new credits, it is quite another to get people to borrow
it, particularly as the biggest CB, the Federal Reserve, has accepted
“high quality mortgage backed securities” as collateral for the entire
$38bn of funds that it injected this week.
“Look at market fluctuations as your friend
rather than your enemy, profit from folly rather
than participate in it”
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