04 February 2010

First-time jobless claims rise and CDS spreads widen

More U.S. workers unexpectedly filed for jobless benefits last week. Initial claims for state unemployment benefits increased 8,000 (28,000 unadjusted) to a seasonally adjusted 480,000 in the week ended Jan. 30, the Labor Department said on Thursday. That was above market consensus of 460,000.
As for productivity, it kept surging during the fourth quarter at 6.2% annual rate and 7.2% in the third quarter (the biggest one-year gain since 2003) with labor cost dropping 4.4% (0.9% for all 2009). This is not surprising since companies continue to lay off workers and wage are still in a deflationary environment (high and rising unemployment and continued delocalizations). Whilst this bodes well for corporate earnings, it is not encouraging for consumption; this recovery will not be sustained without a brisk improvement in the labor market or a new stimulus package which, I hope, will never come since it would be disastrous beyond the short term effect, adding debt and leading to the eventual collapse of the economies concerned. It is not possible to postpone needed adjustments by buying growth via successive stimulus packages without seeding even more difficult circumstances.

This is combining with widening spreads in the debt markets. We have not finished with PIIGS countries in Europe (Portugal, Italy, Ireland, Greece and Spain). Greece is in a very bad shape and the main labor union today called for a strike: this does not bode well for the success of needed reforms to be implemented there. My next main worry is Spain, the fourth largest economy in the Euro-zone.

The EU's endorsement of Greece's budget plan is not going to calm investors’ fears, if one refers to the poor track record of the EU with its own rules (look at France for example or past Greece trafficking of central Bank numbers to join the Euro): politics will always come ahead of reality, even if short term expedients are long term detrimental to what federalist European politicians want. By the way, the Greek Prime Minister points the finger at speculators, the usual scapegoats… (note that when they are going along they are investors, otherwise speculators), and not reassuring.

It would be quite an irony if a new crisis was to originate in Europe without Governments being able to blame the US for their own sins: a much too rapid integration pushed forward by federalist politicians.

What is happening in Greece (and wait for Portugal and Spain) is just exemplifying that without deep reforms undertaken, lax fiscal policies, large public sector and unbearable social benefits coupled with an aging population lead to run away budget deficits and commensurate debts. Also, by not acting when they could (some still can, but time is running short rapidly), it is a certainty that markets will call the shots.

The risk is that the deterioration of sovereign debt spreads to the corporate sector which seems starting to happen.

Markets, already fragile, have reacted negatively to the numbers and the deteriorating Euro-zone sentiment, deepened losses as I am writing (-2.3% for the S&P 500 and the DAX); banks are being hit very hard (-5.5% DJ STOXX 600 banks). Precious metals are also taking a hit (gold -4%, platinum -3.9% and silver -5.3%) like Q3 2008. It looks like a repeat of Q3 2008 when all asset classes collapsed (but Treasuries playing their safe  - not so safe - haven status). I do not know whether we will have a repeat of last year meltdown (I rate it a 10% possibility even to a lesser extent), but it will largely depend on Europe's seriousness and speed of response to the Club Med imbalances crisis (by comparison, this helps the US hence the dollar rally). Markets are also saying that Western countries cannot carry on printing money, contemplate budget deficits running away and ballooning public indebtedness: it is a warning shot.

The Chinese market was a leading indicator in 2008 as were banks, both down and up. Watch bank indices and the Shanghai index together with the S&P 500 and the NASDAQ: 200 days moving average have been reached and in the case of the DJ Euro Banks breached with conviction.

One of my recommendations of the year was to stay away (or be short) of financials in 2010: no change!

I will be away travelling to India for a couple of days, which should be most interesting, and therefore will not post any comment during this period.


BCA Research - U.S. Q4 GDP Growth: Less Than Meets The Eye


Bloomberg: Greece’s Biggest Union Sets Strike, Threatens Cuts (Update1)

Bloomberg: Corporate Credit Risk Jumps as Sovereign Debt Woes Accelerate

United States Department of Labor: Unemployment insurance weekly claims report