Two more tests approach for the slowing US economy.
Tonight is the September jobs and employment report which is nervously awaited by markets in the US and around the world, as usual.
And on Monday the third quarter profit reporting season kicks off with Alcoa’s results and it will be followed over the next two weeks by figures from a group of banks that could drive the market lower.
Big banks, including bank of America, Citi, Morgan Stanley Well Fargo, JPMorgan and Goldman Sachs are all due report what is now universally forecast to be rotten results.
In fact some analysts have Goldman Sachs reporting only its second every quarterly loss since listing more than a decade ago, while they have a big question mark over Morgan Stanley
This week’s profit downgrade from Deutsche Bank was confirmation the banking sector on both sides of the Atlantic will be under pressure in this quarterly’s reporting season, and with markets worried about the health of banks (Especially Morgan Stanley in the US and the big French banks), more volatility can be expected.
Deutsche Bank warned of 500 job cuts and admitted it would not reach its target profit for the year of 10 billion euros. It was forced to take a 250 million euro write-down on sovereign debt.
Revenues at universal banks (such as Deutsche Bank and JPMorgan Chase) are expected to be down more than 10% in the third quarter from the 4th quarter – and investment banking revenues by almost 40% according to Bernstein Research.
Capital markets business is down, takeovers are rare, the IPO market has dried up, junk bond offerings are down as are private placements, most hedge funds are doing it tough and high frequency trading is happening in a falling and very volatile market, which can make for unhappy losses, as we saw recently at UBS.
The fall in asset prices will force losses to be taken as bank mark their books to market, private clients are not trading and the home loan market remains a disaster with very little new business (and a lot of refinancing at lower interest rates, which cuts revenues).
In short its set up for banks to again remind us of 2007-09 and with weak results is capable of undermining market confidence once again.
The fall in commodity prices in the past quarter has taken the pressure off inflation in the US and other countries.
Don’t rule out deflationary fears re-emerging next year of both the US and European economies tumble along at their present growth rates and the instability in financial markets continues.
And the rise in the value of the US dollar will start to impact corporate earnings. There should be a hint in the 3rd quarter reports that will emerge in coming weeks.
It could be areal factor in the 4th quarter and see corporate earnings in some sectors fall compared with the previous periods in 2011 and the same quarter last year.
The September survey of manufacturing was not bad for the US, and nor was the survey of services.
Both didn’t show an economy sliding into a recession.
But US economist Dave Rosenberg made the point yesterday that "the U.S. economy appears to be slowing down considerably."
He asked us to consider:
• The ISM’s non-manufacturing purchasing managers’ index (for the service sector) came in at 53 in September — exactly where it was in November 2007.
• ISM manufacturing was 51.6 last month — where it was in November 2007.
Rosenberg says the recession began a month later.
And in his testimony to the US Congress this week, Fed chairman, Ben Bernanke was just as glooming, warning that the US economic recovery is "close to faltering."
And he also warned that Europe’s economic woes were already having a negative impact on US stock markets.
"Unless the European situation is brought under control, it could be a much more serious situation for the US economy," he said.
"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy," he said.
"Fostering healthy growth and job creation is a shared responsibility of all economic policymakers."
Bernanke was asked about the Occupy Wall Street protests. "I would just say that very generally people are quite unhappy about the state of the economy," said Bernanke, and with "some justification".
"At some level I can’t blame them. Nine percent unemployment and slow growth is not a good situation," he said.
Bernanke said the US economy had grown more slowly than expected, in part because of unexpected setbacks like the Japanese earthquake and Europe’s debt crisis – but also because of the US’s own problems, especially in the jobs market.
"The recovery from the crisis has been much less robust than we hoped."
"Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market," Bernanke said.
"Private payrolls rose by only about 100,000 jobs per month on average over the summer — half of the rate posted earlier in the year – and state and local governments have continued to shed jobs," he said.
Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead, he said.
"We need to make sure that the recovery continues and doesn’t drop back," Bernanke added.
But don’t expect any help with the September jobs
