Credit Writedowns

A chart which breaks down the job losses and gains by industry

Bottom line: I think we are in the technical recovery phase of a double dip recession that is a once in a generation period of balance sheet repair. To me, it’s a depression. Irrespective of what you call this thing we are living through, it is not good. Unemployment is sky high, wage growth is nowhere and we are still beset by crisis.

All of the major sub-indices from new orders to production to employment recorded an acceleration in growth. This is a good report in the face of weakening macro fundamentals globally. However, the US manufacturing sector is very close to contraction even so and this one month increase in data cannot be seen as portending a vigorous revival in growth.

The public has been seeing their (per-capita) “slice of the pie” contract now for six months, and no amount of well spun “sluggish growth” can alter their view of a shrinking reality.

Today’s durable goods orders data lends credence to our projection of fairly robust Q3 US GDP after the dismal 0.8% expansion in H1. The durable goods report is the third important piece of data that should encourage economists to look for something close to what is regarded as trend growth in the US (2.5%-3.0%). The sharp rise in July personal consumption expenditures and the smaller real trade deficit were the other two piece.

Dollar is mostly firmer against the majors as recent risk rally stalls; US NFP is major focus today. Euro zone jitters pick up after troika suspends Greek talks temporarily; Italy also back in focus. EM sentiment remains poor after Brazil rate cut; other risk assets remain vulnerable too.

I would highlight three key points: new orders and production are contracting while inventories are growing. So, overall, I would consider this a weak report that also exhibited soft forward-looking sub-components.

My take: economic growth is moderating in Asia and that has caused central banks to become more dovish. Markets no longer expect the tightening cycle there to continue at the same pace. The 50 basis point cut in Brazil could be seen as a harbinger of more dovish emerging market interest rate policy everywhere – not that the CBs would go so far and cut as Brazil has done. The real question is China. They have been tightening. Will they continue to do so in the face of obvious weakening domestically and in Europe and North America?

I don’t see anything major to disagree with here. Nouriel makes a lot of sense. Notice he’s pegging recession odds at 60%. That number for him was 30% as recently as a month or two ago.

The impact of Fed Chairman Bernanke’s testimony – his assessment of the economy and the further accommodation that can be provided to stem economic stresses into next week – will dominate market action into the next week. The G10 currency complex has been highly sensitive to the global risk environment. The potential to break outside recent ranges is down to the policy responses to the crisis together with the continued evolution of the growth figures with elevated volatility levels indicating the markets are preparing for further disruption ahead.

The Richmond Fed manufacturing index fell to -10 in August from -1 in July, joining other manufacturing index sugessting contraction in the sector.

The first is the size of the ECB bond purchases. Second, the Franco-German summit tomorrow attracts attention. Third, the market continues to pare long Swiss franc positions with the local press suggesting the SNB and government may take new measures. Fourth, the minutes from the BOE’s MPC meeting form earlier this month will be released on Wednesday. Fifth, of this week’s slew of US economic data, the CPI may be the most important.