This CDS report was written by Markit’s Gavan Nolan
Barack Obama’s acceptance speech this week tried to play down the sky-high expectations bestowed upon him. It suggested that he is all too aware of the parlous state of the US economy. He probably didn’t need reminding, but if so the dismal date released this week should have been sufficient. Today’s employment figures were even worse than expected. The US economy lost 240,000 jobs in October, and significant downward revisions were made to the data for August and September. The unemployment rate rose to 6.5% from 6.1%, meaning it is now at its highest rate since 1994. Both manufacturing and service industries lost significant amount of jobs, with retailers and financial services making up the bulk of the latter. This backs up the dismal ISM survey on services earlier this week, which showed the sector contracting at a record rate.
Retailers can be expected to experience tough times in a slump, and yesterday’s sales figures confirmed that this was indeed the case. The International Council of Shopping Centers (ICSC) said the October data was the worst it had seen for that month in 35 years. Department store chains operating at the high-end of the market, such as Nordstrom, Neiman Marcus and Saks, and specialist apparel companies like Limited Brands have been worst hit as consumers refrain from making luxury purchases. No retailers have been immune, but there is increasing evidence that discount retailers are picking up market share. Industry giant Wal-Mart was one of the few to post better than expected same-store sales figures for October.
After widening yesterday, the credit and equity markets have proved surprisingly resilient to today’s non-farm payrolls figures. There is a feeling among some market participants that spreads are already pricing in a deep and prolonged recession. Implied default rates are indeed high. But the economy has proven this year that it can consistently surprise on the downside, and there remains potential for further spread widening amid negative news flow on the real economy and corporate profitability.
Yesterday’s surprise rate cuts have also helped sentiment in Europe. That the Bank of England reduced rates was not a surprise; it was the size of the cut that shocked the market. The 1.5% cut brought bank rate to its lowest level since 1954, and gave investors hope that the BofE has woken up to the severity of the situation. Banks will now be under enormous political and media pressure to pass on the rate cuts, and some have already complied to the government request. It is a clearly a welcome development, but whether it is sufficient to boost the economy is doubtful. More rate cuts are likely, and a fiscal stimulus would be greeted positively by both the electorate and Labour MPs.