Xavier Student Bond Investment Fund Supplemental Economic Report 10/10/11-10/14/11 10/10/11 Sarkozy and Merkel Meet French President Nicolas Sarkozy and German Chancellor Angela Merkel wound up their weekend meeting regarding the crisis in Europe. They vowed to have a comprehensive plan in place to ensure a sustainable path for Greece and provide adequate capital for European banks. While details were withheld, this certainly was welcome news after the announcement that Belgium, France, and Luxembourg will provide 90 billion Euros in funding guarantees for the recently nationalized bank Dexia. The bank had to be bailed out because of its failure to secure lending from other banks due to its vast exposure to Greece and Italy. AP 10/10/11. China Props up Banks China s sovereign wealth fund stepped in on Monday and purchased shares of its banks after they had been caught up in a sell off that many say reflects the broader loss of trust in the integrity of corporate earnings and government statistics. Many have speculated that investors are fearful that other aspects of China s economy may not be what they seem. Central Huijin Investment, the domestic investment arm of the sovereign wealth fund stepped in and purchased shares of Industrial Commercial Bank of
China, Agricultural Bank of China, Bank of China, and China Construction Bank Corp. after they had seen price drops ranging from 14%-31% since August. WSJ 10/10/11. 10/11/11 Small Business Optimism Index NFIB Small Business Optimism SEP 88.8 88.9 88.1 - - Confidence among U.S. small businesses rose in September from a 13 month low the previous month. This is the first gain in 7 months, to 88.9. The index averaged 100.7 in the six year expansion that ended 12/07. Bloomberg 10/11/11. Senate Defeats Obama Jobs Bill The U.S. Senate voted today by a measure of 50 to 48, 10 votes short of what was needed to get Obama s jobs bill passed. While the bill is now dead, Obama did vow to have parts of the bill individually. This certainly is a sign that the federal government will likely not be able to do much to spur job growth until the 2012 election. Reuters 10/11/11. Slovakia Blocks Euro Rescue Fund Slovakia was not able to come to an agreement and voted against the expansion of the EFSF to support ailing Greece. The vote, which was tied to a vote of confidence, also toppled Prime Minister Iveta Radicova s ruling coalition. There is a general sentiment that the new government will vote for and approve the EFSF expansion by the end of the week. The EFSF had been thought of as Europe s main weapon to tackle the debt crisis and save the Euro Zone currency and banks. Greece is within weeks of not being able to meet its payroll obligations. A loan program that had been established is expected to be paid to Greece in early November after the IMF and ECB assess whether Greece has been doing enough to get its finances in order. This would only temporarily buy time for a more structured response. Germany and France have vowed to propose a detailed plan to battle the debt crisis in Europe at an EU summit scheduled for 10/23/11. In the meantime, it appears that the most recent
bailout agreed upon in July will have to be renegotiated as Greece is failing to meet its debt targets. Reuters 10/11/11. Chinese Currency Bill Passes Senate A bill which would punish China for alleged currency manipulation to gain a trade advantage has passed through the Senate and is now in the hands of the House of Representatives. Those in favor of the bill say that forcing China to revalue its currency would help rebalance trade with China and bring jobs back to the U.S. Opponents of the bill argue that this presents a lose-lose situation for both sides and would trigger a trade war with China. Speaker of the House Boehner has already voiced opposition for the bill, however, there is little indication yet on the overall sentiment in the House. CNN 10/11/11. 10/12/11 Mortgage Applications MBA Mortgage Applications 7- - - 1.30% - - - Oct 4.30% Overall, mortgage applications were up1.3% last week. Refinances rose 1.3% while new purchase were up 1.1%. Bloomberg 10/12/11. Job Openings JOLTs Job Openings AUG - - 3056 3228 3213
The number of positions waiting to be filled fell in August for the first time in 4 months. Open positions dropped by 157,000 to 3.06 million. Hiring increased by 38,000 to 4.01 million. Over the same period, employers discharged 1.66 million workers, down from 1.69 million in July. For the 12 months ended in August, the economy created a net 1.2 million jobs. Bloomberg 10/12/11. FOMC Meeting Minutes The minutes from the FOMC meeting in September indicated that several members see significant downside risks to economic growth. While a decline in GDP was not projected, they stated the economy was vulnerable to adverse shocks including pronounced or more pronounced or more protracted deleveraging by households, the chance of a large-than-expected near-term fiscal tightening, and potential spillovers to the United States if the financial situation in Europe were to worsen appreciably. What we now know as operation twist is one of the many options that were on the table for action. One option that is being left on the table if the economy worsens is QE3, which would involve the Fed purchasing long term Treasuries and increasing the size of its balance sheet. Market Oracle 10/12/11. Free Trade Agreements Passed Congress passed long awaited free trade agreements with South Korea, Colombia, and Panama. These are the first trade agreements passed since 2007. The passage of these acts are thought more of as a political achievement as the economic benefits are thought to add to U.S. GDP by only about $14.4 billion, or roughly 0.1%. NY Times 10/12/11. Harrisburg PA Bankrupt After struggling with years of declining revenues and increasing costs, the capital city of Pennsylvania filed for bankruptcy. Much of the $300 million debt burden that the city had struggled was the result of an incinerator project gone bad. Aside from loan payments from the incinerator project, nearly ¼ of the budget was being used for debt payments, which left no room for needed public services. This bankruptcy, if it stands, will be the largest municipal bankruptcy since Vallejo, CA in 2008. Washington Post 10/12/11. EU Pushes Bank Plan The EU set out proposals on Wednesday to shore up European Banks. The commission said tougher reviews of the region's banks using a temporary higher capital ratio, an indication of their ability to
absorb losses, is needed. Banks in need of capital will have to raise it, preferably from private sources, with the governments as a last resort. All holding of EU sovereign debt at prudent valuations will be included in the new reviews. New tests will likely increase the amount of Tier 1 capital to 9% from previous stress tests that required 5%, and they will also require banks to account for losses that could result from their holdings of Greek and other troubled Euro Zone bonds. The proposal would forbid banks in distress from paying dividends and bonuses and would require national governments to set aside funds for banks that cannot raise capital from the private market. The EFSF must also be available to lend money to governments to recapitalize the banks as a last resort. WSJ 10/12/11. Greek Budget Deficit Widens 15% The Greek Finance Ministry announced that their budget deficit from January to September increased to 19.1 billion Euros from 16.6 billion Euros a year earlier. This is a 15% increase and it is being blamed on declining revenues. The government has already admitted that they will miss key deficit targets for 2011 and likely 2012, but if current trends continue they will likely miss key targets in 2013 and 2014. WSJ 10/12/11. Ireland Needs Major Cuts to Meet Budget Targets Ireland s fiscal advisory council said the government will require four billion Euros of budget adjustments to meet key targets in 2012 set out by their bailout lenders. The EU and IMF require the government to reduce a budget deficit of about 10% of gdp to 8.6% by 2012. Government officials said that at minimum, they will consider 3.6 billion Euros in cuts and tax rises in 2012. However, slower than expected growth will require an additional 400 billion Euros in cuts according to officials. WSJ 10/12/11. 10/13/11 Trade Balance Trade Balance AUG -$45.8B -$45.6B -$44.8B -$45.6B The trade deficit was little changed at a 4 month low of $45.6 billion in August. Exports reached near record levels and are being pointed to as a growth driver for the recovery. Shipments abroad reached $177.6 billion, the second highest level ever. Bloomberg 10/13/11.
Jobless Claims Initial Jobless Claims 8-Oct 405K 404K 401K 405K Continuing Claims 1-Oct 3710K 3670K 3700K 3725K Initial Continuing New applications for jobless benefits were little changed at 404,000. The number of continuing claims dropped by 55,000 to 3.67 million. The number of people who are on extended and emergency benefits rose by about 2,300 to 3.55 million. With initial claims hovering around 400,000 it is clear that we are still experiencing a very soggy labor market, and with Obama s jobs bill being shot down, it is unclear if the government will be able to take any action before the next election. Bloomberg 10/13/11. Slovakia Passes EFSF Vote Just days after rejecting expansion of the EFSF, Slovakia voted in favor, giving the Euro Zone the 17 votes it needed. The lending capacity of the EFSF will now be increased to 440 billion Euros, and the EFSF will be allowed to purchase the debt of struggling nations and recapitalize banks facing solvency problems. WSJ 10/13/11. 10/14/11 Import Price Index Import Price Index (MoM) SEP -0.40% 0.30% -0.40% -0.20% Import Price Index (YoY) SEP 12.40% 13.40% 13.00% - -
Imports rose unexpectedly in September in the U.S. fueled by higher costs of crude oil and metals. The increase was 0.3% MoM and 13.4% YoY. Analysts say that slower growth from Europe and Asia may help limit gains in the cost of goods and materials from abroad. At the same time, a lack of job creation is holding down wages, the biggest expense for companies. Bloomberg 10/14/11. Retail Sales Advance Retail Sales SEP 0.70% 1.10% 0.00% 0.30% Retail Sales Less Autos SEP 0.30% 0.60% 0.10% 0.50% Retail Sales Ex Auto & Gas SEP 0.40% 0.50% 0.10% 0.50% Overall retail purchases grew by 1.1% in September, the largest increase in 7 months. Retailers such as Kohl s and Macy s plan on boosting hiring with expectations that demand will continue into the holiday season. 10 of 13 major retail categories saw gains in September led by auto dealers and clothing stores. Bloomberg 10/14/11. Consumer Confidence U. of Michigan Confidence OCT P 60.2 57.5 59.4 - -
Confidence among U.S. consumers unexpectedly dropped in October as American s outlooks for the economy and their finances slumped to the lowest levels since 1980. Consumers may be questioning the progression of the recovery as incomes stagnate, home prices fall, and policy makers debate ways to strengthen the economy. Bloomberg 10/14/11. U.S. Treasury Federal Budget Summary Monthly Budget Statement SEP -$64.0B -$64.6B -$34.6B - - The U.S. government posted its third consecutive annual budget deficit in excess of $1 trillion. The shortfall in fiscal 2011 was up from $1.29 trillion in 2009. This compares to the all time high of $1.42 trillion in 2009. The budget deficit was 8.7% of gdp, down from 9% in 2010. A 12 member congressional panel has been tasked with finding $1.5 trillion in cuts over the next 10 years per the terms of the debt ceiling agreement. If congress does not act on their recommendations by 12/23/11, the compromise will trigger automatic cuts. Bloomberg 10/14/11. China Lending Shrinks, Inflation Tops 6% Chinese bank lending in September hit its lowest level since 2009. Consumer prices rose 6.1% compared with 4% globally. The money supply rose 13% from a year earlier, the least in almost a decade, and data for foreign exchange reserves pointed to capital outflows. Regulators must now weigh whether or not to ease monetary policy as exports also grew at their slowest pace in 7 months, and small businesses are feeling the credit squeeze. Policymakers have, however, said they will not consider a change in monetary policy until November or December. Bloomberg 10/14/11.
10/15/11 Europe Crisis Wins Global Backing Europe s revamped strategy to beat the sovereign debt crisis has won the support of global finance chiefs who met at a preparatory G20 meeting. Europe s strategy, which has yet to be made public, currently includes writing down Greek bonds by as much as 50%, establishing backstops for banks, and increasing the strength of the EFSF. G20 officials that additional aid from the IMF might be possible. Bloomberg 10/15/11. G20 Officials to Consider List of 50 Important Banks G20 members are considering naming approximately 50 banks that they see as systemically important to the global economy and in need of extra capital. The list, drawn up by the Financial Stability Board will first be published in time for the G20 meeting scheduled for November 3. Regulators have said that banks that appear on the list will be required to take on additional capital. Bloomberg 10/15/11. Yield Curve