The Federal Reserve “Beige Book”, released today, will be reviewed carefully by traders and investors to gauge the future health of the US economy. The book indicates that the US economy slowed down from October to mid-November and that housing demand is "quite depressed". Retail spending is "downbeat" and banks are seeing slower growth in loan demand. The US is now pricing in a 50% chance of a rate cut in December.
Overall US economic data was mixed, with weaker than expected US new home sales and a rise in jobless claims overshadowing a strong 3Q performance. New home prices were down 13% in October and the pace of sales continues to fall well short of forecasts.
US Gross Domestic Product in the 3Q grew at 4.9%, outpacing previous estimates by the Commerce Department of 3.9%. The White House reduced forecasted 2008 GDP growth from 3.1% to 2.7%.
The Gulf Arab state of Abu Dhabi will assume a 4.9% stake in Citigroup for $7.5 billion, helping the investment bank increase liquidity and injecting much needed funds. There have also been reports that a prospective Citigroup and Bank of America deal was rejected by Citigroup.
Large retailers in Japan saw their fourth straight month of declines in October, though general retail trade was up due to automobile and fuel sales. Industrial production for October was up 1.7%, slightly above a forecasted 1.6%.
The drought in Australia is continuing to impact negatively on agricultural businesses. Graincorp is the latest to report negative results, a net loss of $19.8 million dollars.
German consumer confidence fell as high energy and food prices weighed on the December numbers.
Virgin Group has been chosen as the preferred buyer of the financially troubled company, Northern Rock. The consortium expects to repay emergency loans by the Bank of England in three years.
Europe’s largest bank, HSBC, has provided funding of up to $35 billion to two of its structured investment vehicles, Culliana and Asscher, to prevent forced sales of its assets.
The problems in the credit markets continue to weigh heavily on the share markets. Economic data is now pointing more decisively to a 2008 recession in the US. The financial markets are pricing in a 50% chance of a rate cut in December with another one expected in February – both in the interest of revitalizing the US economy. There is lingering suspicion that the credit market troubles are not over, which is continuing to cause high volatility in the stock markets. Volatility this week is also due to the expiration of options and futures in many markets.
Looking forward, traders and investors will be keeping a close eye on economic data for signs of a bottom point and a revival in the US economy. The current outlook is not particularly optimistic. Contrarian investors will be looking to the US banking sector for bargains, with many US banks trading at two, five and seven year lows.
Head of Fundamental Analysis
HUBB Financial Group