This week, two months after the
warning, Federal Reserve Chairman Bernanke, in his testimony to the
House Budget Committee, endorsed an economic stimulus package by the
Congress, albeit that he said that it wasn’t his job to advise the
Congress on economic decisions. Within hours of the testimony, George W
announced plans for a $145 BN package of tax cuts. Question is, will the
public use the tax cut to spend OR to reduce debt or perhaps use the
rebate to pay their tax bills in April?
Wall St continued to focus on the growing evidence of a recession that a
growing number feel may already have started. The leading indicators
index declined by 0.2% in December, the 3rd consecutive monthly fall and
declining retail sales in December added to the gloom. Housing starts
and building permits fell by more than expected last month, whist
December “official inflation,” in the guise of the CPI number, remained
constant at 4.1% annualised. Citigroup wrote off $18BN during the week
and cut its dividend by 40%, closely followed by Merrill Lynch, where
new broom, John Thain, announced a $11.5BN write down. The Dow fell by
4% over the week, whilst the S&P 500 and the Nasdaq gave up 5.4% 4.1%
respectively.
Inflation data was also a focus within the UK and the wider Euro-zone,
as the former jumped by 0.6% in December and is now running at 2.1% year
on year, whilst the Euro-Zone CPI remained level 3.1% annualised.
November Euro-zone industrial production fell by 0.5%, more than
expected, and the trade balance eased during the same month. Returning
to the UK, November unemployment remained unchanged at 5.3%, albeit that
3 month average earnings have ticked up. The main European bourses again
followed their American counterparts, with the FTSE100 index lower by
4.8% and the French CAC and the German DAX falling by 5.2% respectively.
Out East, consumer confidence fell in Japan to its lowest level in 4
years as rising gas and food prices, negated by falling wages, bit.
Elsewhere Chinese authorities instructed banks to set aside larger
reserves and introduced price controls, in an effort to halt inflation,
which is running at an 11 year high. The Hang Seng fell by 6% over the
week, with Japan’s Nikkei Dow 225 lower by 1.8%.
On the currency front, the Yen gained 1.45 and the $US index rose by
0.5% to 76.4, whilst the “commodity currencies” of OZ, New Zealand and
S.Africa all fell this week. German 10 year bond yields fell by 10 bps
to 3.97% and the Japanese JGB by 2 bps to 1.39%. Meanwhile the yield of
US 5 & 10 year Treasury’s fell by 7.2% and 4% respectively, ending the
week at 2.85% and 3.65% and down by an amazing 17.5% and near 10% 2008
year to date
Within the Commodities Complex margin calls (on stock investments that
is) were allegedly behind the fall in commodity prices. The CRB index
fell by 1.2% and within it crude oil price fell by 2.4% to $89.9 a
barrel, whilst. the $Gold price eased by 1.8% to $882oz.
Next week sees a holiday shortened trading week for the US, as the
Nation celebrates Martin Luther King day, but sees the latest existing
home sales during it. December money supply figures are released for the
Euro-zone, whilst the UK announces the latest snap shot on public
finances and advance Q407 GDP numbers. December trade data and January
CPI is due out for Japan.
It isn’t only the banks and other sub-prime investors’ who are having
problems of late. The companies that provide bond insurance, such as
Ambac Financial and MBIA, have seen the price of their stock collapse,
placing pressure on their coveted AAA ratings. This week Ambac, who’s
stock price has fallen 96% in 7 months, had its rating with Fitch
downgraded to AA from AAA. Aside of the fact that the company is
unlikely now to be able to write any more business, the thousands of
bonds insured by Ambac, including 138,000 local municipalities, will see
their bond ratings downgraded, meaning higher interest rate cost and
difficulties in raising fresh capital.
“Some debts are fun when you are acquiring them,
but none are fun when you set about retiring
them”
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