Morning Report
In overnight trading the Nikkei was up 415 points or 2.6% to close at 16569 on the news that President Bush would be speaking this morning on help for homeowners with subprime mortgages. The news buoyed the Asian markets, which were also helped by strong earnings from Dell and other tech companies. July Housing Starts in Japan came in well below estimates with a 23.4% decline after a build of 6% the previous month. Construction Orders were also down 10.4% vs. an expected increase of 12.5%. The Hang Seng rose 500 points to finish at 23984.
European indices are also up about 1% across the board in anticipation that both speeches this morning will provide some relief for embattled lenders and homeowners. However, Eurozone Consumer Confidence for August fell to its lowest level in 6 months as the reading came in at -3, below the -2 market estimate. Industrial Confidence remained unchanged at 5 in spite of anticipated decline and the unemployment rate for the Eurozone remained unchanged as expected at 6.9%. German Retail Sales for July came in slight below projections at 0.3% vs. an upwardly revised 1.2% for June. The USD is currently down vs. the majors but up over 116 vs. the JPY as the carry trade resumes.
U.S. equity indices were higher overnight on anticipation Bernanke at 10am and Bush at 11am will provide a double-barreled market boost. Bernanke is unlikely to tip his hand on rates at the housing and monetary policy meeting in Jackson Hole, WY. Expect he will discuss both issues with an emphasis on regulating predatory lenders with existing laws. As for monetary policy, if Bernanke highlights perceived weakness within yesterday’s GDP data or suggests deeper fallout from subprime/credit crunch, the market will expect a rate cut. Realistically, Bernanke cannot cut rates in response to the hue and cry from Wall Street without finding some link to his inflation fighting mandate.
Bush is expected to announce some form of help for homeowners though he will stick to his guns on raising caps on Fannie and Freddie - he’s against it. Instead, it is expected he will allow changes in the Federal Housing Administration mortgage insurance program allowing those falling behind due to adjustable rate mortgages to refinance at lower rates because they will be insured by FHA, thus protecting the new lenders from default. The plan is expected to affect 80,000 homeowners, just a drop in the bucket of the anticipated 2 million ARMs that are expected to reset in the next year. DOW futures are currently trading up 104 points on anticipation that these two speeches will provide some relief to the markets. The NASDAQ and S&P are also up in pre-market trading.
McGraw-Hill replaced Standard & Poor’s President Kathleen Corbet amidst criticism for the company’s role in the subprime mess. Deven Sharma was named President as Corbet resigned to “pursue other opportunities.” Company executives claim Corbet’s departure has nothing to do with criticism over the ratings agency’s failure to foresee the crisis in the subprime paper; S&P shares have fallen 26% since the start of the year.
Barclays announced it will help rescue a $1.6 billion debt fund run by Cairn Capital after it was unable to raise money in the credit markets. Barclays’s securities unit will provide a loan to refinance the fund’s asset-backed commercial paper as it falls due, according to a statement this morning. Barclays announced yesterday that they were “flush with liquidity.”
This morning brings us a slew of economic data, but Bernanke and Bush will remain the focus of the markets. At 8:30am we’ll bring you July Personal Income from Commerce, the market is expecting a reading of 0.3% vs. a prior reading of 0.4%. Core PCE is expected to rise 0.2% vs. a reading of 0.1% for June and Personal Spending is expected to climb 0.3% vs. 0.1% in June. At 9:45 we’ll bring you the August Chicago Purchasing Manager Index; the market expects a slight drop to 53.0 vs. a reading of 53.4 for July. 10:00 brings a host of numbers along with Bernanke’s speech; Final numbers for August UMich Consumer Confidence are expected to read 82.5 following a prior reading of 83.3; Factory Orders from Commerce are expected to rise 3.3% for July after a build of 0.6% in June and August NAPM-Milwaukee is due after a reading of 57 in July. Regardless of the outcome, the reaction to Bernanke’s speech will likely be volatile due to thin volume before the holiday weekend; whatever movement the markets see today, they are unlikely to hold into next week.