Moody’s and Fitch frown on EU’s historic accord

Last Friday’s agreement to keep the euro zone from splintering was billed as an historic accord that would require deeper fiscal integration with the threat of sanctions if member states didn’t abide by tough budget rules.

On modest volume, stocks gained ground on Friday but credit markets were a bit more cautious.

Much like the October 27 agreement to save Greece, scrutiny and the glare of the spotlight are already giving rise to the naysayers.

Moody’s noted prior to the opening this morning, “The communiqué issued by European policymakers after the recent euro area summit offers few new measures and therefore does not change our analysis of the rising threat to the cohesion of the euro area and the further shocks to which it and the wider EU remain prone.”

Not wanting to be left out of the fun, Fitch Ratings at midday added, “The gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond.”


Counterparty risk: Rising overnight bank deposits at the European Central Bank highlight growing fear in Europe.

Both agencies warned that downgrades remain a possibility. Stay tuned.

Stocks warm to elusive eurozone solution

Stocks finished last week in a favorable fashion amid signals from eurozone leaders that a solution, or at least some type of stop-gap measure that provides breathing room, is at hand.

The Sunday deadline was pushed back to Wednesday, but that didn’t hinder the bullish mood on the Street on Friday.

Despite the optimism that has been aided by numerous sound bites, credit markets don’t seem to be buying it. Yields on European bonds have been rising, and tension in the credit markets has yet to abate.

3-month LIBOR Rate

Source: FreeStockCharts.com

European leaders are aware of the consequences of not getting a deal done. I suspect a compromise is in the works, but will it be as far-reaching as some equity players are hoping for?

Weekly jobless claims back below 400,000

Weekly jobless claims fell 37,000 in the latest week to 391,000, the first time since early April that jobless claims dipped back below the psychologically important 400,000 level.

The unexpected decline also had a favorable impact on the 4-week moving average, which slipped 5,250 to 417,000.

Although this is one of my favorite leading indicators because of its timeliness and its read on business confidence – note, its rise above 400,000 in the spring provided an early warning signal on the impending slowdown, I’m skeptical about today’s welcome drop since there has been little else to suggest that a much-needed pick up in economic activity is at hand.

Further, Bloomberg News reported that difficulties in making seasonal adjustments may have played a role.

I’d like to wait for another round or two of data.

Fed begins two-day meeting against weak backdrop

The Fed began its two-day meeting today and will conclude tomorrow against the backdrop of a floundering economic recovery and a jobless rate north of 9%.

Most analyst believe the Fed, which pledged to hold rates low until at least mid-2013 at the August meeting, will take another step toward easing in the hopes of jump-starting employment growth.

Promising to hold rates low for another two years appears to have done very little for the economy and many believe new steps will have just a limited impact.

The Street expects the Fed to extend the length of its bond portfolio, popularly called “Operation Twist,” by swapping shorter-term debt for longer-term debt.

Theoretically that might lower longer-term rates.

But how much this is already priced into the yield curve is unknown, and long-rates are already at historic lows – a 4% 30-year fixed rate mortgage. And potential home buyers aren’t jumping at the bait.

So it stands to reason that even lower rates would have just a muted impact on the economy.

Despite expectations, correctly calling what the Fed may do can be as dicey as calling the offensive play on third and goal at the five.

Will it be a run up the middle, sweep around the end, QB rollout and pass? Maybe it’s not that tricky but it’s possible the Fed could surprise.

A full-blown QE3 – always a possibility – could be implemented, but the track record for QE2 – higher inflation and anemic growth – suggests we’d get even less bang for the buck this time around.

The Fed could cut the rate it currently pays on excess reserves (near $1.6 trillion) from 25 basis points, as it hope to encourage lending.

However, lending institutions are already forgoing higher rates on credit cards, mortgages, auto loans and business loans by earning just a paltry 25 bp!

Cutting the rate by 10, 20 or the full 25 would provide little incentive to lend when many are shying away from new debt.

Further eliminating the rate on excess reserves could make it more difficult for the Fed to manage the fed funds rate.

Unfortunately for the millions who remain jobless, the Fed has few credible options left in its arsenal.

Faltering consumer confidence takes a toll on retail sales

Consumer confidence, as measured by both the Conference Board and the University of Michigan, went into a tailspin in August – thanks in large part to the divisive debt ceiling debate, the S&P downgrade, the faltering stock market and the deepening gloom emanating from Europe.

With growing uncertainty and weak job and income growth, retail sales out this morning had been highly anticipated since it would provide a concrete gauge on the public’s mood.

Unfortunately, the best consumers could muster was a flat reading in August. Excluding autos, sales managed a meager 0.1% rise.

Further, June and July were revised lower.

Last month’s free-fall in consumer confidence, along with the factors mentioned above, very likely accounted for the weak showing at the nation’s malls.

If there is a silver lining, sales did not mirror the steep drop in confidence, and it appears the economy continues to expand at a very tepid pace.

But the anxiety many of us feel is being reflected in the latest numbers offered up by the government.

Growth in nonfarm payrolls stalls

The government reported this morning that nonfarm payrolls in August were unchanged from the prior month.

That’s right – no change, zero. In the meantime, the private sector added just 17,000 jobs and the unemployment rate held steady at 9.1%, the fifth consecutive month the jobless rate has held above 9.0%.

A more formal look is available at Examiner.



Simply put, fiscal and monetary policy have their limits and we are seeing this play out before our eyes.

The president proposed and passed an$800 billion stimulus package early in his administration.

And the Fed has kept rates at zero for over two years and has pledged to keep rates low for another two years.

It has also pumped over $2 trillion into the economy in what is popularly called QE2.

The end result: very weak economic growth and a stubbornly high unemployment rate.

Pending home sales reflect sluggish housing market

The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 1.3% to 89.7 in July from 90.9 in June.



One again, Lawrence Yun, the NAR’s chief economist, noted that tight lending standards continue to hamper the existing home market.

Based on anecdotal evidence from realtors, he is probably correct, but his assertion that “The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy” is a bit premature in my view.

Potential buyers continue to fret over the direction of home prices, and others who would like to move are finding it difficult to sell their current home or are unable to fetch a price that would leave them with the necessary equity to invest in a new house.

Further, job insecurities and lackluster consumer confidence, along with competition from foreclosures, remain a headwind.

Spending powers ahead
A welcome surprise for an economy that has been awash in weak data. Consumer spending grew by a healthy 0.8% in July.  A rebound in purchases for durable goods, including autos, led the way but gains were broad-based.

Even accounting for a rise in headline inflation, real spending, or spending adjusted for inflation, increased by a solid 0.5%, the best reading since December 2009.



But the overall trend remains lackluster, as the slowdown in income growth – compliments of weak employment growth – hinder spending.

Additionally, the debt ceiling debate that has sapped confidence may not manifest itself in the numbers until August. Stay tuned.