World Week Ahead: Disconnected and disenchanted
By Timothy Moore
Aug. 8 (BusinessDesk) - This past weekend provided a welcome - at least temporary - respite from the turmoil which culminated in the U.S. losing its top-notch credit rating at Standard & Poor’s after one of the worst week for equities in two years.
The debate began almost immediately on Friday night as to whether the downgrade meant more to the U.S. government or S&P, which has struggled since the global financial crisis to put its reputation back together. It and the other credit agencies took it on the chin for being overly generous with their ratings.
Over the course of the weekend, the debate shifted to what impact it would have on Barack Obama being re-elected in 2012, and for that matter, the rest of the U.S. lawmakers who will be seeking votes at a time when the majority of Americans are saying the divisiveness in Washington is yet another sign of how alienated the political elite are from the everyday trials of those searching for work or working below their potential.
What’s true beyond any doubt is that last week was great if you had been shorting equities, and commodities. For the week, the S&P 500 plunged 7.2% in its largest weekly slide drop since November 2008. Copper traded in New York shed 8.1%. Oil lost 9.2%.
While not unexpected, S&P’s decision was a shocker nonetheless, a historic decision. It has cut its rating on U.S. debt to AA+ from AAA.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics,” S&P said in a statement.
But S&P wasn’t finished. It said the outlook on the new U.S. credit rating was still "negative", which means it might cut the rating again in the next 12 to 18 months.
S&P also said it’s “pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.”
The more immediate focus for investors as this week begins may be what the Federal Reserve’s policymakers have to say after they meet on Tuesday in Washington. The expectation is that the FOMC will say U.S. interest rates really aren’t going to rise for a long, long time. There’s even some chatter that the Fed may consider buying more securities, though more truly dismal economic data may be needed first.
There’s no doubt that the U.S. economy is flagging, but talk of a renewed recession seems premature.
Despite all the gloom about the state of the U.S. economy, the July payrolls data released on Friday came in better than expected - it appears that the labour market is stabilising, and that’s great news.
Nonfarm payrolls increased 117,000 after slowing abruptly in the past two months, Labor Department data showed on Friday. The rise beat economists' expectations for an 85,000 gain, Reuters reported. The unemployment rate dipped to 9.1% from June's 9.2%, but that was because discouraged job-seekers gave up the search for work.
The bottom line is that a heck of a lot more jobs will be needed before a dent can be made in all of the ones lost in the last few years. But signs that the private sector is hiring again - and that’s where the real money is - are a bonus.
Unsurprisingly, government payrolls fell for a ninth straight month and given the debt situation, and the appeal of spending cuts, there won’t be much on offer in the public service for the foreseeable future.
“This (private-sector hiring) shows that the U.S. economy is not dead yet. We have potential to get back on track with moderate growth to a strong recovery next year,” Kurt Karl, head of economic research and consulting at Swiss Re in New York, told Reuters.
In another positive amid a slew of negatives, Italy has stepped up its efforts to put its finances in order and to check the eurozone’s lingering debt crisis.
Of course, the decision by Italy’s government to accelerate implementation of austerity measures came after a run on its bonds, but it is taking action far faster than other nations in Europe which have mostly fiddled, allowing speculators to drive bond yields to successive record levels and further erode confidence in the euro zone.
Investors will be hard pressed into buying mode anytime soon. The jury’s out as to whether the recent correction has made some stocks cheap or whether the froth has been replaced by a more realistic outlook for corporate earnings given the disconnect in the global economy.