Wednesday September 30, 2009

Wednesday September 30, 2009
- more mixed economic information....
- with government spending leading the way I am not sure what that forebodes for any meaningful recovery....taxation only goes so far!
- the FDIC news ('at the current pace of failures' - not a very feel good remark!) - surprising that it will 'sit well' with banks...while earnings pressure continue and liquidity still considered an issue....a 'carrot' accounting move to allow those monies to be expensed over 13 qtrs while getting the funds now.......what does the mean for the future ?

prb

S&Y PSG Morning Market update

* The Bureau of Economic Analysis (BEA) reported this morning, Wednesday
September 30 that the third and final revision of 2nd quarter GDP came in at -0.7%. This was less than the second revision of -1.0% and was better than the -1.2% consensus estimate.(The initial estimate of 2nd quarter GDP in early August was -1.0%.)The better than expected GDP number this morning indicates that the economy is doing better than previously thought and tends to confirm the fact that the US economy has bottomed out and is clearly in the recovery phase of the business cycle. However, it is important to note that a large part of the better than expected GDP figure came from a big jump in government consumption.

* In addition to the GDP "good" news, the BEA also reported that personal consumption fell only -0.9% in the 2nd quarter and the overall GDP price index for the quarter was unchanged, 0.0%. When the volatile food and energy component are excluded, the GDP price index was up a relatively modest +2.0% (annualized) for the quarter. These price figures suggest inflation remains in check.

* Also this morning (9/30), ADP released their employment report for September and it showed a -254,000 drop in ADP processed payrolls from August to September. Although ADP total non farm payrolls are still falling, the rate of decline has slowed markedly over the past 7 months. In March the ADP payroll drop was -736,000; each month since then the decline has been shrinking.

* Unsurprisingly, all of this better than expected economic news pushed Treasury prices lower in early (9/30) trading. The 10 year UST is down -¼ of a point and the yield is up +2 basis points from yesterday's(9/29)close to 3.33%. The 30 year long bond is off roughly -½ of a point and the yield is up to 4.05%. The 2 year UST is essentially unchanged with a yield of 1.02%.

* Yesterday (9/29) the FDIC announced their plan to recapitalize their insurance fund. At the current pace of bank failures, The FDIC expects to deplete the fund very shortly and the FDIC is under pressure to keep the fund solvent. The FDIC will require all insured banks to prepay 3¼ years of insurance assessments by the end of 2009. According to the FDIC, this prepay scheme will provide a cash infusion of $45 billion for the insurance fund. The banks will be able to expense the initial outlay to the FDIC gradually over the next 13 quarters. It appears that this proposal has the backing of the banking industry.

* Tomorrow's (10/1) economic calendar is relatively crowded starting with the release of personal income and spending for August. The market is anticipating further positive signs the economy is well on the road to recovery and consumers are beginning to reassert themselves. In addition, jobless claims for late September will be reported by the Department of Labor. We will also see construction spending and pending home sales for August. Despite having to digest the economic implications of all Thursday's economic data, the market will be looking ahead to Friday's (10/2) unemployment report for September. The consensus is predicting a -180,000 drop in non-farm payrolls and a +0.1% rise in the unemployment rate to 9.8%.