July 23rd, 2012 9:41 AM by Mel Samick
In an internationally coordinated attempt to save the global economy from a continuing slump, two major central banks reduced interest rates last week. China cut interest rates for the second time in a month as its benchmark rate dropped 25 basis points to 3.0 percent. The ECB cut its benchmark rate by 25 basis points to 0.75 percent, but fell short of announcing any further LTRO (longer-term refinancing operations) programs. LTRO involves the central bank lending money at a very low interest rate to euro zone banks. The injection of cheap money means that banks can use it to buy higher-yielding assets and make profits, or to lend more money to businesses and consumers which could help the real economy return to growth as well as potentially yielding returns. Additionally, the Bank of England increased its asset purchase program by £50 billion in a widely expected move. These moves were able to lift the European and Chinese markets for a day but it was not perceived as enough to maintain momentum.
All major indices were down by around 1 percent last week. The S&P closed at 1,354 while the Dow ended the trading week at 12,772. In major economic indicators released last week, and to investors' disappointment, Non-farm Payrolls only increased by 80,000 against expectations of 100,000 for the month of May. Private payrolls also missed investors' expectations and increased by only 84,000. The Unemployment rate was unchanged at 8.2 percent as expected but many potential workers have simply stopped looking for work and aren't even counted. Though hiring is on the slower side, to investors' relief, so are layoffs. Data on job cuts from the Challenger survey, Gray & Christmas showed 37,551 layoffs in the month of June, the lowest number in the last 13 months. The overall slowing labor market is the major factor in slowing economic growth. In other economic indicators, Factory Orders for the month of May was in positive territory of .7 percent after April‘s .7 percent decline. In other good news, Construction Spending jumped 0.9 percent in May beating the consensus, following a 0.6 percent gain in April. Consumer spending on motor vehicles also picked up to a 14.1 million unit annual rate in June from May's reading of 13.8 million.
The not-so-rosy outlook domestically and beyond has led investors to seek safe-havens. Considered to be one of the safe havens of choice, the Ten year treasury yield was down 4 basis points and ended the week at 1.55 percent. Towing the same line, mortgage rates were also down last week. At the end of the week, the Conforming Fixed 30-year rate leveled out at around 3.35 percent, while the Conforming Fixed 15 year rate finished at around 2.75 percent. Standard 5/1 ARM rates were hovering around 2.81 percent. Low rates could provide some help to the economy if more people were able to take advantage of possible refinance opportunities. When people refinance at lower rates, they pay less interest on their loans and have more money to spend. Many homeowners use these savings to spend on renovations, furniture, appliances and other improvements, which help drive growth.
This week investors' focus will be on corporate earnings. Alcoa will be the first one releasing earnings, on Monday afternoon. JP Morgan and Wells Fargo will report earnings on Friday. In other major economic indicators, Weekly Mortgage Apps will be released on Wednesday, Jobless Claims on Thursday and Consumer Sentiment on Friday.
Information provided by NYCB Capital Markets