Although house prices declines set in
about 18 months ago, and look set to accelerate their rate of decline,
the US Treasury and the Federal Reserve Chiefs’ have “ostrich like”
refused to recognise that the problem was never likely to be contained
to the “sub-prime area” nor that it was always likely to spill over into
the wider economy. More on this below.
US economic data continued to concern, as November pending home sales
slipped by 2.6% versus the -0.7% expected and the November US trade
deficit also jumped by more than the consensus thought. Adding to the
jitters were the latest consumer credit figures, which showed a monthly
jump to $15.8bn as against the $8bn expected. The Bank of America
stepped in with a $4BN acquisition ( paying about 30c on the Dollar) of
the Nations largest mortgage firm, the otherwise bankrupt Countrywide
Financial, whilst Merrill Lynch spooked the market as it is expected to
announce yet further massive losses. The Dow ended lower by 1.5% over
the week, whilst the S&P 500 gave up 3/4% and the Nasdaq slipped by
2.6%.
Euro-Zone PPI in November rose to 0.8%, or 4.1% annualised, whilst the
regions unemployment rate for the same month was steady at 7.2%. Like
their US counterparts, the Zone’s retail sales have disappointed of
late, with November sales falling by the most in 10 years. UK retail
sales in December also sagged, evidenced by the M&S share price collapse
of 20% in a day. Despite worrying money supply data and the increasing
“official inflation numbers,” the ECB and the Bank of England MPC left
interest rates on hold, at 4% and 5.5% respectively. The main European
bourses followed their American counterparts, with the FTSE100 index
lower by 2.3% and the French CAC and the German DAX falling by 1.4% and
1.2% respectively.
Out East, Japan’s December vehicle sales fell by 7.5% and for calendar
year 2007 are at a 35 year low, whilst in China last month’s trade
surplus fell to $22.7bn versus the $26.3bn in November 2007. Elsewhere,
India’s Industrial production grew in November by 5.3% annualised, the
slowest pace in 13 months. The Hang Seng fell by 2.3% over the week,
with Japan’s Nikkei Dow 225 lower by 4%.
On the currency front the $US index rose by 0.25% to 76.01, with the
“commodity currencies” of OZ, New Zealand and S.Africa all fairing well.
German 10 year bond yields fell by 4.5 bps to 4.09% and the Japanese JGB
by 4.5bps to 1.42%. Meanwhile the yield of US 5 & 10 year Treasury’s
fell by 3.1% and 1.1% respectively, ending the week at 3.07% and 3.81%.
Within the Commodities Complex the crude oil price fell by 5.9% to $92.2
a barrel, whilst. the $Gold price added 3.7% to $898oz after touching a
new record “futures price” after a near 30 year gap.
Next week is all about inflation, as the latest numbers are due out for
the US, the UK and the wider Euro-Zone. The US also releases the
December housing starts and building permits, whilst the UK releases the
latest house price figures and December unemployment. Japan and Europe
also announce their latest trade numbers.
Now that it has become more “obvious” that the credit crunch is not
contained to the sub-prime sector, Treasury Secretary Paulson spoke
openly about the need to bring in government measures to prop up the
"system" as fast as possible (the plunge protection team?) Meanwhile Fed
Chairman Bernanke all but promised a substantial rate cut when the FOMC
meets at the end of this month as he acknowledged a weaker economy and
the need for further relaxation in monetary policy. The Fed Chairman
assured the American public at large, that the Fed would take
substantive action to support growth and to provide adequate insurance
against downside risk.
“Those who fail to learn the lessons of history
are destined to repeat them”
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