Here's a summary of what has happened since our last bi-weekly review of July 30, 2009.
Friday, July 31, 2009: US GDP
[Note: Numbers are in order of : Actual-Forecasted-Prior]
USD Advance GDP q/q -1.0% -1.4% -6.4%
Meaning: shows rate of contraction slowing
Week of August 2-8
GBP Manufacturing PMI 50.8 47.7 47.4
USD ISM Manufacturing PMI 48.9 46.4 44.8
USD Pending Home Sales m/m 3.6% 0.6% 0.8%
USD ADP Non-Farm Employment Change -371K -351K -463K
USD ISM Non-Manufacturing PMI 46.4 48.1 47.0
USD ADP Non-Farm Employment Change -371K -351K -463K
GBP MPC Rate Statement More QE, UK recovery weak
USD ISM Non-Manufacturing PMI 46.4 48.1 47.0
USD Non-Farm Employment Change -247K -320K -443K
USD Unemployment Rate 9.4% 9.6% 9.5%
Our View
The theme of the above was that manufacturing was improving, jobs losses were overall slowing down. The main event of the week, US non farms payrolls was 23% better than forecasted, 44% better than the prior month.
Significantly, it showed average hourly wages and average hours worked per week both rising. This was a rare case of genuine good news and sign of recovery. For the past weeks, stocks and other risk assets rallied based on big name stocks beating lowball estimates with slightly less awful results.
Stocks, commodities, and related currencies (AUD, NZD, CAD) rallied. A big exception, the USD actually rallied along with stocks due to improving fundamentals of the underlying US economy reflected by the NFP data. This was unusual, because the USD has mostly been bought only as a safe haven when stocks and other risk assets retreat, thus it tended to drop when stocks, commodities and risk-appetite currencies (AUD, NZD, CAD) rallied. Traders will be watching for further evidence that the USD may once again begin to trade on fundamentals.
Stocks, commodities, and commodity/high yielding currencies that rise with risk appetite and optimism rose.
The following week had its share of potentially market moving news, listed below. However, global stock, commodity, and forex markets have traded in tight flat ranges awaiting further clarification.
Week of August 9-13
[Note: Numbers are in order of : Actual-Forecasted-Prior]
FOMC FOMC upbeat, suggests end to stimulus by autumn.
EUR German Prelim GDP q/q 0.3% -0.2% -3.5%
EUR French Prelim GDP q/q 0.3% -0.3% -1.3%
EUR Flash GDP q/q -0.1% -0.5% -2.5%
Our View
There was actually slight expansion from Q1 to Q2 in the Eurozone. Although annual growth remained negative, with Germany contracting -5.9% and France -2.6%, French Finance Minister Christine Lagarde promised that growth will pick up going forward. For Germany, this was the first positive quarter since the start of 2008 breaking a string of four consecutive quarters of negative output.
These results provide tangible evidence that global economic recovery is taking place. The growth in Germany was led by an increase in government spending and private consumption with construction and exports supportive as well. There is no doubt that massive fiscal stimulus programs along with European version of “cash for clunkers” initiative helped to spark a rebound in Q2 from near depression like levels of Q1. In case of France much of the gains also came from a sharp reduction in imports which feel -2.8%.
The big question going forward is whether government spending has created enough momentum to generate organic growth in H2 of 2009. For now all signs suggest that at the very least EZ economy has stabilized after the economic dive of Q1 and growth could be positive for the rest of the year.
Questions about the sustainability of the recovery remain. Much will depend on continued demand from China and a revival of domestic consumer spending. On both fronts there are reasons to be concerned as Chinese growth appears to have peaked in Q2, assuming one believes the Chinese data. Also, both German and French retail sales remain moribund as consumers are still wary of economic conditions.
Finally, there is still plenty of potential trouble from the US banking system. Continuing job losses, hordes of Adjustable rate mortgages resetting at much higher levels, weak US commercial real estate values, etc, are all contributing to dramatically higher default rates on all kinds of debt.
Conclusion
Markets appear set to continue to trade in flat ranges until the next major market moving news. The coming week is light on major news.
Stocks are likely to continue to set the direction of global markets up or down. Most markets are at the upper ends of multi- month ranges after July's earnings season rally. We suspect that stocks, and thus commodities and forex, may be overextended and vulnerable to a pullback. Our reasons include:
A record 13.9% of companies beat their EPS estimates, prior record was 7.9% in Q1 of 2004. This appears to suggest that the game of lowball estimates have become far more exaggerated.
Year over year profit growth is still at -29.5%. Yes, that's better than the -31.7% consensus estimate before Q1, but at the start of the year estimated growth rate for Q2 was -11.3%, So actually, earnings are coming in below expected by more than 18 percentage points on this basis. Few have mentioned that particular statistic.
Guidance: Again, not a broadly reported statistic, but there have been 39 negative EPS pre-announcements versus 15 positive pre-announcements thus far for 3Q. That yields a negative/positive ratio of 2.6x, which is actually well above the 1.8x at this same juncture during the Q1 reporting season three months ago and the long-run average of 2.1x.
Valuations: The S&P 500 is trading at 16.5x calendar year 2009 earnings estimates; 14.7x four-quarter forward estimates; a 13.2x calendar year estimates. These are forward estimates, which are merely analyst projections, and they are based on operating, not reported earnings. And the best, the very best, multiple that can be drummed up is 13.2x. That doesn’t exactly sound like bargain prices from where we sit, especially when dividends are being slashed and the corporate bond market is still offering up coupons of over 7%.
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments
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