A major headline this past week was October retail sales, which declined 2.8% — the fourth consecutive decline — and the largest drop since records began in 1992. Much of the decline is attributable to falling gas prices and dismal auto sales; but the multi-month slide points to further contraction in consumer spending, which may lead to a more severe recession for the U.S. economy.
While consumer confidence plunged to its lowest ever recorded measure in October, another measure of consumer sentiment ticked up in November as the continued slide in gas prices has brought much needed relief.
The U.S. economy already contracted at a 0.3% annual rate in the third quarter, as consumer spending, representing 70% of economic output, declined at an annualized rate of 3%. Additionally, the housing sector continued to drag down economic growth, and business investment slumped the most since 2002.
Unemployment is ratcheting up as the U.S. economy shed 240,000 jobs in October, bringing the unemployment rate up to 6.5%. Last week unemployment claims climbed to 516,000 — the highest since post 9/11.
U.S. equity markets have yet to enter a sustained rally since the S&P 500 plummeted nearly 30% in a four-week stretch ending Oct. 27. Volatile markets have experienced corrections to both the up and downside (a correction is defined as a 10% move), but recession fears and negative corporate forecasts rattled investors this past week and equity markets revisited their October lows.
Large cap stocks fell more than 6% last week while small cap stocks fell nearly 10%, leaving broad market indexes down 40% for one year. U.S. Treasuries rallied as investors sought safe haven, lowering yields. While there was some improvement in the investment-grade corporate bond market, a continuation of deleveraging and forced selling pushed yields to historic levels for high-yield and mortgage-backed securities.
U.S. and other world policymakers have become increasingly involved in trying to unfreeze credit markets and jumpstart economic growth with aggressive new measures.
Below are key U.S. government initiatives taking place just this past week:
- The infamous $700 billion TARP plan took a new direction this past week as Treasury Secretary Paulson announced that all of the money would be used to address capital needs of financial firms and slow the pace of foreclosures. Already $125 billion has been sent to banks in the form of capital injections.
- The Fed Funds rate was slashed to 1% at the end of October, with the Federal Reserve citing “downside risks to growth.” Hoping for further monetary stimulus and taking cues from Ben Bernake, the futures market is currently pricing in an over 80% chance of another 50 basis point rate cut in the key Fed Funds Rate at the next scheduled Federal Reserve meeting. Bernake pledged this past week that “policymakers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."
Other major events/economic data shaping this week:
- A key measure of the health of the credit markets is LIBOR (LIBOR measures the cost of unsecured borrowing by banks) and its spread compared to other interest rate measures such as T-bills and the Fed Funds rate. While banks are not yet lending freely, a meaningful improvement in credit markets has been witnessed in LIBOR’s steady decline to 2.15% since peaking at around 4.75% Oct. 13.