Equity Firewall Holding For Now

September 16, 2008

As the FOMC met, U.S. equities managed to lose little additional net ground in the first hour of trading.  Overseas markets had tumbled sharply further overnight. An article by Sudeep Reddy and Jon Hilsenrath in today’s Wall Street Journal says monetary officials would like to avoid a rate cut today, contrary to how markets are positioned, but will shift to an easing bias and indicate a willingness to reduce rates if needed before the next scheduled FOMC meeting.  No doubt a planted story by officials, the WSJ serves the dual purpose of preparing markets for a surprise and sending out a trial balloon to gauge how investors might react if no rate cut is forthcoming today.  The article mentions that the decision is still in play and will likely be influenced by today’s developments.  The stability of U.S. equities, if sustained, would probably enable the FOMC to keep its powder dry.

In other significant developments this morning,

  • July capital flows reported by the U.S. Treasury foreshadow the liquidating markets that have intensified this month.  Foreigners sold $26.6 billion net of U.S. long-term securities, while U.S. investors sold $31.7 billion of foreign securities in July.  The net $6.1 billion inflow was far lower than the recent trend, but the $64.7 billion per month average net inflow in April-July was similar to the 2007 mean of $66.0 billion per month.  This is a very volatile data series, so it’s necessary to consider several months together to spot a trend change.  Foreigners were net sellers of Agency bonds, corporate bonds and equities during July.
  • Canadian manufacturing sales advanced 2.7% in July, more than five times the expected increase, and were 11.5% greater than last December.  The streak of four consecutive monthly increases is the longest since 1H02.  The Canadian dollar’s pullback from an extraordinarily overvalued peak last November of 0.9061 per USD has given manufacturers some relief, but manufacturing orders have recovered less sharply (7.6%) than sales since end-2007.
  • The volume of German retail sales, including gas stations and vehicles, has been revised down from a 0.6% increase in July to a decline of 1.5%.  Such fell 4.2% in the year to July and was 2.4% lower than the 2Q mean after posting a 2.1% drop in 2Q from 1Q.
  • U.S. CPI inflation eased two-tenths to 5.4% in August, but core inflation remained steady at 2.5%.  While headline inflation was 1.6 percentage points greater than in Euroland, core inflation was a tenth of a percentage point below.

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