Mixed data leads to mixed markets

Yesterday, the Federal Reserve released the minutes from their June meeting and the market was a tad surprised that the changes relative to April’s forecasts were mostly positive. Fed commentary in recent weeks has been mostly gloomy but the revisions to the central tendencies for official projections were all upward, for both growth and core inflation. The information on the asset purchases programs and balance sheet was really interesting (and we should learn more next week from Bernanke). The intimation is however, that the Federal Reserve Board staff expects the Central Bank’s balance sheet to peak later this year and decline gradually from then on. Given that we are currently down by about $300 billion from the peak last December, this implies that we are due a degree of expansion over the next 3-6 months via an increase in the asset buying programme. The feel-better-factor appears directly related to the upturn in US earnings figures that are coming through. Of 42 2nd Quarter Results reports so far, 28 (66.7%) have had positive surprises, and 10 (23.8%) have had negative surprises. On the calendar scheduled for release today are JPMorgan and IBM. The market will be looking for their results to emulate good reports from Goldman Sachs and Intel this week.

Yesterday China revealed perhaps another part of the reason for strong asset markets. The country’s M2 surged to a new record since data avail in 1999 of 28.5%, well above expected 26.7%, compared to an average in past years around 18% and their GDP this morning was also stronger than had been anticipated. China’s economy gathered momentum in the 2nd Quarter of the year thanks to a continuation of the massive fiscal and monetary stimulus. Annual GDP growth accelerated to 7.9%, up from the 6.1% reported for Quarter 1, making China the best-performing of all the world’s major economies. This leaves the Chinese Government’s full-year growth target of 8% within what appears to be easy reach.

Yesterday’s UK jobs figures were, as reported during the rest of the day, horrendous. UK unemployment data rose to hit a 12 year high of 2.38 million in the three months to May, equivalent to 7.6% of the workforce. This bigger than expected jump is the largest rise we have seen since records began in 1971 and 2.4% higher than it was this time last year.  Interestingly, figures also showed a surge in young people who are out of work with those up to the age of 24 being hit particularly hard. Data revealed that the unemployment among the under 25s is spiraling to the highest level since 1993. The Office for National Statistics said claimant count unemployment rose by 23,800 in June, much less than the forecast of 40,500 and lower than May’s revised 30,800 which shows the pace of decline has eased. However, economists are still predicting the number of unemployed to rise to around 3 million by the middle of 2010. A further worrying trend is that of the above total, over 500,000 have now been out of work for longer than 12-months. Following on from the unemployment data we also had UK average earnings released yesterday. Excluding bonuses, earnings grew 2.6%, the lowest since 2001 although average earnings in the three months through to May rose 2.3% from a year earlier. Even these numbers had positive spin exerted upon them and as such, Sterling reacted not one jot.

Other important news, this time from the US, were adverse developments in the saga of CIT, the 20th largest ranked US bank by assets, and a major lender to small businesses. CNBC, citing a source close to the company reported that the company were likely to file for bankruptcy as early as tomorrow given that they are not now expecting any assistance from the Federal Reserve. Further news on this subject would likely cause a mark down in US equities later BUT if results from IBM, Google and JP Morgan are in line with other earning’s results, then the CIT news will probably be glossed over.