BIG TEST

Falling oil prices and relief about the US Federal Reserve’s position on the economy boosted stocks. The S&P 500 Index rose 1.2%, to 1,311, and the yield of the ten-year US Treasury note fell five basis points to 4.73%. The big question though is what will happen as Wall Street guys return en masse, suntanned and perhaps ready to reconsider their portfolios.

The other global equity indexes we tracked advanced as well with most gaining about one % over the week. We noted that oil futures have dropped below the US 70.00 mark again, closing Friday at US$69.15 for the October contracts. In important economic news last week, data released showed a steady US labour market and solid manufacturing activity, all supported by increasing consumer spending despite deterioration in the housing market and weaker consumer confidence figures. Perhaps the high point in the US data last week was Friday’s non-farm payroll figure which showed employment increased by 128,000 in August. The payroll increase was higher than the average monthly gain for the prior four months, which stood at 117,000. The US unemployment rate for August was little changed at 4.7%. Average hourly earnings in August rose US$0.02, or 0.1%, less than the increases in the prior two months.

And it would be important this week to discuss the world’s largest economy and its current GDP production figures. The preliminary revision to real gross domestic product (GDP) for the second quarter was close to consensus estimates. The US economy grew at an annualised rate of 2.9% in the second quarter, higher than the 2.5% originally reported but a sharp drop from the 5.6% annual growth rate of the prior quarter. The boost partly reflected strong growth in state and local government spending and greater investment in inventories. Vehicle sales, which added to first-quarter growth, detracted from second-quarter GDP.

US Federal Reserve Chairman Ben Bernanke was in the news again last week. In a letter obtained on Friday by the media, Bernanke said that chances of an economic crisis in China were low, but that the possibility of a “hard landing” for the economy could not be dismissed. “We believe that the chance of a Chinese economic crisis is very low for the foreseeable future,” Bernanke wrote in a August 30 letter to Senate Banking Committee Chairman Richard Shelby.

UNITED STATES

In the United States, the Institute for Supply Management (ISM) reported that manufacturers enjoyed a 39th consecutive month of economic expansion. The ISM Index stood at 54.5 in August, little changed from the prior month. Construction spending fell 1.2% in July from June. The steepest fall was in private residential construction, down 2.0% from June. Private non-residential construction increased 0.3%, and public construction fell 0.7%, partly due to a slow down in highway construction.

In point of fact, last week started out on a gloomy note in the USA, with a report that the index of consumer confidence dropped sharply in August. A July reading of 107.0 fell to 99.6 in August, its lowest point since the period following Hurricane Katrina just over a year ago. The reading reflected consumers’ increasing pessimism over both current and future business conditions. For example, the number of consumers who saw jobs as being plentiful dropped 14.6%, while the number who saw jobs as being scarce increased 7.6%. Notably, the proportion of consumers who expected that their incomes would increase in the months ahead (an important indicator for consumer spending) declined to 17.7% from 18.3%.

The fall in consumer confidence may also reflect consumers’ rising debt levels. The personal savings rate slipped further in July, as the increase in personal spending continued to outstrip the increase in income. Personal savings as a percentage of disposable personal income fell to a negative 0.9% in July from June’s negative 0.7%. The slip resulted from a 0.5% increase in personal income, which got a large boost from income on rental property, versus a 0.8% rise in spending, twice the prior month’s spending increase. The personal consumption expenditures price index, closely watched by the US Federal Reserve Board, increased 0.3% in July. Orders for factory-made goods fell a less-than-expected 0.6% in July.