Market Commentary United States

All in not well on our financial body. The organs seem to be in satisfactory condition, but the blood is not really circulating. The rapid changes of fortunes among the top firms did not bring a solution to the crisis, but created a short-term period of grace. But it’s grace under fire. The Federal Reserve's lending surged by a record $285 billion last week, and discount window borrowings rose $10.2 billion to $49.5 billion, as the financial crisis has been worsening.

The dollar exploded higher against the European currencies, initially after the House of Representatives unexpectedly failed to ratify the Bush administration's $700 billion TARP to rescue banks, and then on expectations that the House will actually pass the TARP by the end of the week. But it edged slightly lower on Friday after the House of Representatives (finally) approved the $700 billion TARP in a 263-171 vote. The revised plan is expected to thaw the frozen credit markets, but the traders doubt it will fail to prevent an economic recession.

We are not alone in this historical crisis. The European banking system is also under fire.

The acceleration of the downturn in Europe and the lack of liquidity underpinned demand for dollars. French President Sarkozy said the France is basically in recession. The fallout from the failed initial $700 billion bailout for Wall Street accelerated the financial crisis, which spilled over Europe (B&B in the UK, Fortis in Benelux, and West LB in Germany). Germany struggled to rescue lender Hypo Real Estate, and Ireland promised to guarantee all bank deposits. But the 300 billion euros Euro-TARP proposed by France was promptly torpedoed by Germany. EU governments to breach deficit limits, saying the financial crisis was so severe they could waive their usual strict application of budget rules.

It was the first time the EU appeared ready to invoke a 2005 clause that allows countries to bend the rules laid down in the Stability and Growth Pact if they fall victim to exceptional events outside their control.

Another week, another big name gone from the US financial roster– this time, Wachovia was initially morphed into Citigroup, just to switch out on Friday and merge with Wells Fargo, outside the realm of the FDIC. But the high-stake drama continues; Citigroup won a court order late on Saturday blocking Wells Fargo from buying Wachovia Corp until the court rules otherwise.

Surprisingly, the US jobless data, horrible as it was, only mattered for about 60 pips of nervous trading. It’s gotten so bad that this key report was put on the back burner, as in “what did you expect?” While the number might have been skewed by the tropical storms down south, don’t hope for an improvement – the opposite will happen. Payrolls fell by a more than expected 159,000 in September after a, upwardly revised 73,000 decline (from –84,000) in August and downwardly revised –67,000 from –60,000 in July. The jobless rate remained at 6.1 percent but only because it surged 0.4 percent a month earlier.


Initial jobless claims increased 1,000 to 497,000 in the week that ended September 27 from an upwardly revised (as nearly 100% of the times) 496,000 (initially 493,000) the prior week. What happened to the “exceptionally” high number from the previous week? Haven’t the tropical storms passed already? Let’s not kid ourselves, the total number of people collecting benefits is the highest since 2003.


For all it’s worth, the ADP's decline of 8,000 in private employment in September from 37,000 the month before was modest.

Consumer spending was flat in August from a revised +0.1 percent in July. Personal income rose by 0.5 percent after a revised 0.6 percent drop, the personal savings rate fell to 1 percent from 1.9 percent in July, while the disposable income fell by 0.9 percent after -.8 percent.


The Conference Board's confidence index increased to 59.8 September, a third consecutive increase, from 58.5 in August. That’s nice but irrelevant, since the survey was taken before the most recent financial meltdown.


In the same vein, the Chicago Purchasing Management index fell to 56.7 in September from 57.9 the prior month.


The ISM manufacturing index collapsed to 43.5 in September from 49.9 in August. This is a recessionary level as the credit crunch is strangulating the economy. Looking into details, new orders fell to 38.8 from 48.3, production to 40.8 from 52.1, and employment to 41.8 from 49.7.


Construction spending was flat in August after falling 1.4 percent in July.

Factory goods orders contracted 4 percent in August, as orders for motor vehicles succumbed 10.6 percent, the most since December 2002.


Elsewhere, the S&P/Case-Shiller 20 city index fell 0.9 percent in July and 16.3 percent on the year.