Weekly Market Recap

by Jeffrey Friedman

As many Federal Reserve officials have been forecasting for a few months, the first half of the year is indeed looking weak. But it is not clear that the Fed sees the economy as weaker than they anticipated. Currently, the key to whether the economy is slowing too much is the strength of the labor market.

This past week the markets were rattled not only by Fed speak but by an indicator that usually does not get much attention – the Institute of Supply Management’s (ISM) non-manufacturing index.

Markets fear that weakness in the economy is spreading. Housing has been in recession for some time and manufacturing has shown signs of turning negative. What was supposed to keep the economy out of recession was the service sector, but last week’s non-manufacturing ISM report cast doubt on its strength. The ISM’s non-manufacturing business activity index plunged to 41.9 in January from 54.4 in December. This is the most extreme move on record and the lowest reading since the 2001 recession.

Productivity and labor costs also came out last week, and did not represent a worsening in inflation pressures but merely quarterly volatility in output and hours worked. Fourth quarter productivity decelerated to an annualized 1.8 percent increase, following a 6 percent surge in the third quarter. Unit labor costs rebounded 2.1 percent annualized in the fourth quarter, following a 1.9 percent decline in the third quarter.

We had quite a number of Fed officials on the speaking circuit last week and there was some divergence about the direction of policy.  However, they all seemed to agree that recent problems in the financial markets are going to take some time to correct, and that the first half of the year is going to be very weak.

This weakness was reflected in the stock market’s performance last week, and the S&P 500 closed lower four of the five trading sessions. On Friday, March S&P futures ended with a loss and posted an inside session Friday, as the market traded within the prior day’s highs and lows. Inside sessions are often indicative of market indecision, but not only do the fundamentals show a weak outlook right now, so do the technicals. Momentum indicators, the stochastics and relative strength index (RSI) both are pointing to lower prices. Look for support at 1331 and resistance at 1397, the 50 percent retracement level of the October-January decline.

Across the pond, the European Central Bank governing council left its key interest rate at 4 percent for the ninth month. ECB president Jean Claude Trichet remains unswervingly committed to fighting inflation, in spite of expectations that eurozone growth will slow along with the rest of the global economy.  Meanwhile, the Bank of England’s monetary policy committee lowered its key interest rate by 25 basis points to 5.25 percent. It last lowered its interest rate at its December 2007 meeting. Although now lower by 50 basis points, the Bank still has the highest interest rate among G7 countries.

The euro currency sank against the dollar after a survey suggested activity in the eurozone service sector slowed to 50.6, its weakest level since July 2003 and readings for Germany, Italy and Spain plunged below 50, indicating contraction. This came after flirting with a record high on Monday.  Only France bucked the trend of the big economies. Analysts said traders seem to have concluded that a lot of the bad news concerning the U.S. economy was already priced into the dollar. The figures fuelled speculation that the European Central Bank would have to abandon its hawkish stance on interest rates when the ECB, as expected, kept interest rates on hold at 4 percent. The euro sold off sharply on the news, and analysts said they expected the trend to continue.

Crude oil prices netted the week up on supply issues and despite concern over a softer U.S. economy. March NYMEX crude futures closed up $3.66 a barrel Friday at $91.77, overcoming a mid-week pullback. Violence in Nigeria and Turkish military action in Kurdish northern Iraq bumped up the crude oil futures at the start of last week. But on Tuesday and Wednesday, recession fears were the focus. Tuesday’s sharp decline in the ISM non-manufacturing index weighed on crude oil prices as did Wednesday’s unexpected surge in oil inventories. Progress on the fiscal stimulus package nudged prices back up on Thursday, and behind bullish news Friday included a reduction in exports from Nigeria, lowered projections for output from the North Sea in March, and fears that OPEC will be cutting production at its upcoming March 5 meeting to provide a price floor of $80 - $85.

Financial Fundamental Reports:  Week of Feb 11 – Feb 15, 2008

Date	CT	Release	For	Actual		Consensus	Prior	Revised
Feb 12	13:00	Treasury Budget	Jan			$29.0B	$38.2B
Feb 13	07:30	Retail Sales	Jan			0.0%	-0.4%
Feb 13	07:30	Retail Sales ex-auto	Jan			0.25%	-0.4%
Feb 13	09:00	Business Inventories	Dec			0.45%	0.4%
Feb 13	09:30	Crude Inventories	02/09			NA	7052K
Feb 14	07:30	Initial Claims	02/09			360K	356K
Feb 14	07:30	Trade Balance	Dec			-$61.5B	-$63.1B
Feb 15	07:30	Export Prices ex-ag.	Jan			NA	0.3%
Feb 15	07:30	Import Prices ex-oil	Jan			NA	0.3%
Feb 15	07:30	NY Empire State Index	Feb			7.0	9.0
Feb 15	08:00	Net Foreign Purchases	Dec			NA	$90.9B
Feb 15	08:15	Industrial Production	Jan			0.15%	0.0%
Feb 15	08:15	Capacity Utilization	Jan			81.4%	81.4%
Feb 15	09:00	Mich Sentiment-Prel.	Feb			76.8	78.4

 

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