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Financial Markets: Headlines for September 2

September 2, 2011

EQ The S&P 500 reversed the gain made in the wake of the ISM manufacturing report and lost 1.2% on Thursday in broad declines led by financials (-2.3%), although the index remained above the 1200 mark; European bourses closed mixed; the Dax lost 0.9%, as sentiment came under pressure from weak figures on Eurozone manufacturing activity and German growth; the FTSE100 rose 0.5% to 5418.65 amid reports that UK banks would not face immediate restructuring as a result of the Independent Commission on Banking’s final report to be issued on Sept 12; Euro Stoxx 50 got a late boost from the not-as-bad-as-feared ISM result and rose for a second session, up 0.2% to 2305.75

FI USTs dropped after the ISM headline but then bounced to end the day sharply stronger in heightened caution ahead of the nonfarm payrolls report, as some analysts revised down NFP forecasts; the US yield curve bull-flattened with the 10yr yield down 9bps to 2.130% and the 30yr down 11bps to 3.495%; the Sep11 Bund future jumped 74 ticks to 135.30; Italian and Spanish yields stabilized, up 1bp each at the 10yr maturity to 5.129% and 5.023% respectively

FX The euro weakened broadly for a second session, amid the latest signs of cyclical slowdown against the backdrop of the ongoing debt crisis; EUR/USD lost 0.8% to 1.426 and touched the weakest level since August 12; the Swiss franc rallied broadly for a second day as the SNB did not announce any new initiatives and Eurozone manufacturing PMIs showed further deterioration; the US dollar index rose for a 3rd consecutive session, up 0.5% on Thursday to 74.56

Oil WTI Oct’11 crude closed flat at $88.9bbl despite declines in riskier assets on Thursday, as the contract gained some support from supply concerns related to a developing storm in the Gulf of Mexico

$ Fed’s Duke (voter) said the housing market is “severely out of balance” and is hampering the recovery; she urged study of the Home Affordable Refinance Program to determine why use of it by eligible homeowners has been low

$ The Fed ordered Goldman Sachs (GS, -3.5%, $112.16) to hire an outside consultant “to review foreclosure proceedings initiated by [former subsidiary] Litton that were pending at any time in 2009 or 2010”; the Fed “believes monetary sanctions are appropriate and plans to announce monetary penalties”

EM Brazilian FinMin Mantega said “the currency war is going to get worse” if the US implements QE3; Brazil is ready to take strong measures to keep the real around 1.60 and will push back against QE policy in the G20 and other forums; the central bank announced late on Wednesday a surprise rate cut of 50bps to 12.0%

€ Spain sold €3.6bn in 2016 bonds on Thursday, within the target range of €3-4bn; the average yield was 4.489%, down from 4.871% at the last 5yr sale on July 7; the bid/cover ratio was weaker at 1.80 vs. 2.85 in July

€ Bundesbank President Weidman said that monetary and fiscal policy have been blurred because of the crises and "in the long run this strains the trust in the central banks, and therefore for monetary policy it matters that the additional risks that have been taken on [are] reduced again"

€ ECB’s Stark said the debt crisis in the developed world is not over; the US has an “enormous” debt problem and lacks structural solutions

€ ECB’s Nowotny said growth prospects have clouded; related to the upcoming ECB staff forecasts he said “that growth is to go down somewhat in 2012; it will not decline in 2011, but the picture will be slightly different"; inflation with decline in 2012; he said the ECB is closely watching Italy’s moves on its austerity plan

€ Finance ministers of Germany, the Netherlands and Finland will reportedly meet on Tuesday in Berlin to discuss the issue of collateral for loans to Greece – Reuters

€ Finnish parliament’s Grand Committee is reportedly likely to endorse the proposed changes to the EFSF – Reuters

€ Greece’s 2011 deficit-to-GDP ratio may come in at 8.1-8.2% for 2011 versus the target of 7.6% according to a government official; a source close to the EU/IMF/ECB troika said the ratio may be at least 8.6% in 2011 – Reuters

$ US ISM manufacturing index fell to 50.6 in August from 50.9 in July, holding above 50 which surprised against the more pessimistic median analyst forecast of 48.5; at 50.6 the PMI is now at the weakest level since July 2009 and below the series’ 63-year average of 52.7, outlining subpar growth; among the index’s constituents, the new orders balance remained in contraction territory at 49.6 vs. 49.2 previously; the production balance dropped to 48.6 from 52.3 and was the lowest since May’09 during the recession; inventories and employment rose in August and supplier deliveries slowed, which kept the PMI headline above the 50 mark

$ US initial jobless claims fell to 409k in the week to August 27 and were broadly in line with the median forecast of 410k, down from a revised 421k in the previous week (originally 417k); the Labor Department said no special factors affected the data, after claims were elevated in the previous 2 weeks due to the labor dispute at Verizon; the 8wk moving average of initial claims fell to 409k and was the lowest since the week ended April 23; claims for continuing benefits, which are released with a lag, fell 18k to 3.735m

$ US domestic vehicle sales slowed slightly in August to an annualized pace of 9.52m versus 9.62m in July but the result was above the consensus forecast of 9.45m

$ US construction spending fell 1.3%MoM in July, disappointing versus consensus at +0.2%, but June’s increase was revised up to +1.6% (originally +0.2%) and May’s to +2.5% (originally +0.3%) which will increase the contribution to Q2 GDP; federal construction spending fell 2.1%MoM in July to $275bn, the lowest level since Jul’06

$ US nonfarm productivity was revised down to show an annualized decline of 0.7% in Q2 vs. -0.3% originally and -0.6% in Q1 reflecting the downward revision to Q2 output while hours were unrevised; unit labor cost growth was revised up to 2.7% from +1.9% originally, and compared to a year ago, unit labor costs were up 1.9%, the strongest increase since Q4’08

$ US ICSC chain store sales rose at a steady annual pace of 4.6% in August but this was below the YTD average of 5.1%

€ Eurozone final August manufacturing PMI was revised down to 49.0 from the “flash” estimate of 49.7, disappointing versus expectations of an unrevised reading, now at the lowest level since Aug’09; new orders contracted across all countries covered in the survey; German manufacturing PMI was revised down sharply to 50.9 from 52.0 reported originally for August; French PMI was revised lower as well, to 49.1 from 49.3; Italy’s PMI signaled contraction at 47.0 vs. 50.1 in July

€ German GDP growth was confirmed at an anemic pace of +0.1%QoQ in Q2, the slowest so far of the recovery, versus +1.3% in Q1; private consumption slumped 0.7%, disappointing versus consensus at -0.2%; net exports subtracted from GDP as well, reducing headline growth by 0.3ppts vs. +0.3ppt in Q1; a positive change in inventories supported growth (+0.7ppts) as did an increase in business investment on machinery & equipment (+1.7%QoQ)

€ Italian hourly wages were flat in July versus +0.1% in June, and the annual pace slowed to 1.7% from 1.8%

£ The UK manufacturing PMI came in line with consensus at 49.0 in August and the July reading was revised up slightly to 49.4 from 49.1 reported originally; new orders contracted for a 4th month and employment fell for the first time in 17 months


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