Week ending 5th September 2008   

It was a light week for US economic news which included the fact that construction spending fell in July. However, the latest figure on US jobs was dire, as the August “official” unemployment rate jumped to 6.1% versus the 5.7% seen in July. Aside of being far higher than most economists had expected, it is at the highest level in almost 5 years. Stocks had a very volatile week, with the Dow lower by 2.8%, whilst the S&P 500 and the Nasdaq fell by 3.2% and 5.6% respectively.

Euro-Zone interest rates were left on hold, at 4.25% and 5% respectively, as both the ECB and the Bank of England remained cautious on inflation. With the July Euro-Zone PPI number at 9% year on year and the UK’s July M4 money supply forecast to be at 11.2% annualised, they may have a point. Retail sales fell by 0.4% across the Euro-Zone during July, whilst predictions of a £40BN loss for UK mortgage lenders, assuming the negative equity resulting from a 35% fall in residential property prices, also undermined investor sentiment. The FTSE 100 index collapsed by 7%, its worst weekly fall in 6 years, whilst the French CAC and German DAX were hit by 6.4% and 4.6% respectively.

Out East, the OZ central bank cut interest rates by ¼% to 7%, its first cut in 7 years, as retail sales slumped by the most in six years, slowing the economy. Meanwhile, August vehicle sales fell by 14.9% year on year in Japan The Nikkei fell by 6.6% and the Hang Seng by 6.2%.

The $US index gained 2% to 78.93, whilst the Euro fell by 1.7%. German 10-year bund yields declined by 17 bps to 4%, whilst Japanese 10-year “JGB” yields rose by 5.5 bps, ending the week at 1.46%. US Treasury yields fell, with 5 year yield lower by 4.9% to 2.9% and the 10 year yield down by 3.6%, ending the week at 3.66%.

The commodities complex witnessed a continued sell off, with the crude oil price lower by 7.8% to $1106.2 a barrel and the price of Gold fell by 3.3%, ending the week at $803oz.

Next weeks main economic data due for release includes the latest trade numbers for the US, the UK and Japan and August PPI figures for the US and the UK. Japan announces the latest on bankruptcies whilst the Q208 employment statistics for the Euro-Zone will be of interest.

Aside of the initial $200Billion of US taxpayers money being thrown at the GSE’s, Secretary Paulson also stated that the Treasury is initiating a temporary program to purchase GSE mortgage backed securities (MBS’s), the “toxic waste” which has already caused a $500Billion of losses within the global banking system. More soothing words suggested that “as the Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program.”

“It is a good thing that we do not get as much government as we pay for”

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