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Financial Markets: Headlines for September 1

September 1, 2011

EQ The Dow rose 0.5% on Wednesday and erased its loss on the year, now up 0.3% YTD; the S&P 500 also gained 0.5% and traded above 1200 during the entire session (despite news that a big antitrust lawsuit was filed in the telecom space), cutting the August monthly loss to -5.7%; the US ADP payrolls and Chicago PMI were weaker than in July but still signaled expansion and did not shock to the downside, while investors remain focused on the prospect of more Fed support; European shares rallied and the Stoxx 600 gained 2.9% on Wednesday, cutting the month’s loss to -10.5% (the worst since Oct’08)

FI USTs fell and the yield curve steepened; the 30yr yield rose 8bps to 3.601% and the 10yr yield was up 5bps to 2.223%; core Euro area government bonds fell as well and peripheral yields stabilized; the German 10yr cash yield jumped 7bps to 2.214%; the UK 10yr gilt yield surged 10bps to 2.601%, the highest since August 10; iTraxx W. European sovereign CDS index fell 10bps to 290

FX The Swiss franc rallied across the board as the government said that the economy will have to live with a strong exchange rate for some time, and that only the SNB can affect the franc in the short-term; EUR/CHF lost 2% to 1.16 and the euro weakened broadly versus other major currencies; EUR/USD hit its intraday high after the German cabinet approved changes to the EFSF but the pair ended down 0.5% at 1.437 by the US close; the dollar also strengthened versus the pound but weakened against other European and Asia majors as risk assets strengthened; gold declined slightly and the Dec’11 contract lost 0.4% to $1831.7oz

$ Fed’s Lockhart (non-voter): "In more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy”; he said the Fed plans to maintain a large balance sheet for “the foreseeable future”; he did not rule out any policy option including an attempt to ease further, and noted that an “operation twist” to change the maturity composition of the Fed’s securities holdings has a benefit in that the balance sheet size would not increase; he was more cautious on the idea of tying policy action to economic outcomes such as a specific unemployment rate; he also seemed cautious on more QE and said it works best when there are deflationary pressures or a clear drift into recession; weak US growth means that slack is rising in the economy even though there is technically a recovery; the US is facing a jobs’ crisis

€ German Chancellor Merkel’s cabinet approved new powers for the Eurozone EFSF on Wednesday; the vote in the Bundestag is scheduled for September 29

€ Italian Treasury reported that planned 2011 debt issuance is about €430bn; they have completed more than 70% and the remaining 30% will be split about equally between long- and short-term issuance

€ Bank of Greece’s Provopoulos said the merger of two of Greece’s largest lenders “sets the stage for more changes that will form a very positive picture in the banking system which has suffered the consequences of the debt crisis”

€ Greek banks Piraeus and Eurobank have confirmed use of the Bank of Greece’s emergency liquidity assistance facility (ELA)

€ A Greek parliamentary committee set up to monitor the Greek budget said in a report that “the steep debt rise, high primary deficit … and the deeper recession have stretched to the limit the debt dynamic, which is out of control…It is highly unlikely that the debt ratio will stabilize in 2012, reinforcing the doubts of the markets about the success of the medium term plan and the recovery of the Greek economy”

£ UK BoE MPC member Posen called for more QE by G7 central banks; “additional monetary stimulus is the last line of defence for the advanced economies today, and G7 central banks should purchase more assets if we are to have any hope of our economies ever catching up"; he said inflation is not a threat currently; if the economic improvement from past QE has been deemed insufficient, the dose should be increased; he criticized the ECB for “threats of withholding stimulus to try to compel elected officials into fiscal rectitude”

CH The Swiss economy minister said that the country will have to live with the strong Swiss franc for some time, which “is still massively overvalued”; “only the SNB can have a short-term impact on the franc”; the government announced an economic support package of SFr 870m

$ US ADP private employment rose 91k in August, less than the consensus forecast of +100k and the revised gain of 109k in July (originally +114k); the figures did not reflect the Verizon labor dispute according to ADP; the 3-month average fell to +115k, down from +199k in March; ADP services employment rose 80k on the month vs. +111k in July; manufacturing payrolls fell 4k vs. -2k in July

$ US Challenger planned job cuts rose 47%YoY to 51.1k in August; the figures continued to outline deterioration in the labor market, as cuts were higher versus a year ago for a 3rd consecutive month; in August, cuts by industry were led by government, finance and retail

$ US Chicago PMI fell to 56.5 in August from 58.8 in July, the lowest since Nov’09, although the PMI was above the consensus forecast of 53.3 and remained stronger than the historic average of 54.5; the result signals another decline in the ISM manufacturing index today; the Chicago production and new orders balances fell to 3m lows of 57.8 and 56.9 respectively in August and were broadly in line with historic averages; order backlogs contracted (at 49.6 vs. 55.7 previously); employment rose at a modest pace (52.1 vs. 51.5); prices paid growth was the weakest since Oct’10

$ US factory orders rose 2.4%MoM in July and surprised versus consensus at +2.0%; nondurable goods orders rose 1.0% in July vs. +0.2% in June; the gain in July durable goods orders was revised up to 4.1% (originally +4.0%) and the decline in core capital goods orders was revised to -0.9% (originally -1.5%); shipments of core capital goods accelerated on a 3m annualized basis to 13.4% from 11.2% in Q2 and +3.9% in Q1

€ Eurozone “flash” CPI for August held at 2.5%YoY as expected and remained below the YTD average of 2.6%, although still above the ECB’s price stability target of below, but close to, 2%

€ The Eurozone unemployment rate was 10.0% in July, steady versus June and May, although the number of unemployed rose for a 3rd consecutive month, at 15.76m in July versus 15.61m in April

€ German unemployment fell 8k in August versus a revised decline of 10k in July (originally -11k), down for a 26th consecutive month; the unemployment rate held at 7%

€ German retail sales were flat in July versus the consensus forecast of -1.5%MoM, although the June increase was revised down to +4.5% (originally +6.3%); retail sales remained in negative territory versus a year ago, down 1.6%YoY versus -2.1% in June

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