U.S. economic news for the week ended August 12, 2011

Following a controversial downgrading of U.S. debt by ratings agency Standard & Poor’s late Friday, August 5, investors sent stock prices tumbling and gold prices soaring Monday. That set off a turbulent week of extreme financial market volatility around the world. Jittery nerves swept through Asia and Europe and back to the Americas, as fears grew regarding the escalating European debt crisis and a global economic slowdown. The stock selloff put more than half of the countries in the MSCI All-Country World Index in bear-market territory, with losses of 20%-plus since recent highs.

An attempt by U.S. President Obama to calm investors on Monday fell flat, as U.S. stock indices gave up more than 5%. The U.S. Federal Reserve Board’s pledge Tuesday to hold interest rates low until mid-2013 temporarily calmed markets. However, all of Tuesday's stock market gains were erased on Wednesday, as investors focused on the Fed's projection of two years of slow growth, which was why the Fed had made its low-rate pledge. The Chicago Board of Options Exchange (CBOE) Volatility Index reached 48 on Monday, and the major stock indices gained or lost 4% or more daily for four consecutive days, a level of volatility not seen since the fall of 2008. CBOE Volatility Index values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty. Optimism returned Thursday, on Cisco Systems’ positive earnings report and a drop in weekly U.S. jobless claims. Thursday marked the seventh straight day in which the Dow Jones Industrial Average reversed its previous day’s direction. The volatility has been magnified by leveraged exchange-traded funds that add to the market’s movements each day.

Through all this, despite the debt downgrade, U.S. Treasuries ironically retained their status as safe-haven investments, as investors lacked confidence in other alternatives amid so much uncertainty and volatility. Gold futures contracts set a record of $1,817 per ounce during the week. However, accounting for inflation, gold would have to reach $2,400 per ounce to equal its previous record high. As projections of future economic growth faded, the price of a barrel of oil fell to just above $80 Wednesday, before rebounding to $86 by Friday.

U.S. and global economic news

European debt concerns grow; ECB buys more bonds
On Monday and again Tuesday, the European Central Bank bought Italian and Spanish government bonds to stabilize borrowing costs for the European Union’s third- and fourth-largest economies in a critical and dramatic move to stem Europe’s growing debt crisis. The ECB’s bond purchase program had been inactive for four months before the central bank resumed purchases of Portuguese and Irish bonds last week.
Eurozone production slips
Eurozone industrial production shrank 0.7% from May to June, the European Union’s statistics office reported. France’s economy had no growth in the second quarter, while Greece’s economic output contracted 6.9% from a year earlier.

U.S. Treasuries continue to serve as safe haven
Despite the downgrade of U.S. sovereign debt from AAA to AA+ by Standard & Poor’s, demand for U.S. Treasury securities remained very high this week. Yields, moving in the opposite direction to bond prices, fell to 2.10% for the 10-year Treasury note on Wednesday and just 0.17% for the two-year note. Yields rose slightly by Friday – to 2.25% and 0.19%, respectively – as a more optimistic mood settled the market somewhat. Few alternatives exist to U.S. Treasuries, given their depth and liquidity, with more than $9.3 trillion in debt outstanding.

U.S. consumer confidence plummets
Confidence among U.S. consumers fell in August to its lowest point since May 1980. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment plunged to 54.9 from 63.7 in July. A decline to 62 was expected in a Bloomberg News survey. Rising pessimism after the downgrade of U.S. debt and the current stock market volatility could weigh down consumer spending.

Gold benefits from heightened unease
Gold lived up to its reputation as an investment to hold amid uncertainty and volatility. The price of an ounce of gold in a forward contract rose to $1,817 on Wednesday before dipping below $1,800 Thursday.

U.S. retail sales rise
Retail and food services sales were 0.5% higher in the United States in July from June, as consumers spent more on gasoline, electronics, and other merchandise.

U.S. productivity weakened in second quarter
U.S. worker productivity fell for the second consecutive quarter, as employee output per hour declined at an annual rate of 0.3% in the second quarter of 2011 after falling 0.6% the previous three months. Declining efficiency and rising costs are disincentives for companies to hire more staff or increase pay.

Jobless claims ease
Initial claims for unemployment benefits by U.S. workers fell by 7,000 to a seasonally adjusted 395,000 in the week ended August 6, according to the U.S. Department of Labor. The four-week moving average of new claims fell by 3,250 to 405,000.

German exports drop
German exports declined in June, in another sign of economic weakness in Europe. Exports from Germany fell 1.2% from May while imports rose 0.3%. Demand for German-produced goods eased as neighboring countries sought to reduce spending because of the sovereign debt crisis and the demand for fiscal restraint.

U.S. and global corporate news

Commerzbank hurt by Greek debt exposure
Commerzbank, Germany’s second-largest bank, had a 93% drop in its net profit in the second quarter from the year-earlier period after writing down all of its Greek sovereign debt exposure. Operating profit fell 77%. However, Commerzbank said its core bank is on track for a 2011 operating profit higher than last year’s 1.98 billion euros.
McDonald’s same-store sales up 5.1%
Same-store sales at McDonald’s restaurants rose 5.1% in July, as the fast-food giant’s sales grew in all regions. McDonald’s continues to benefit from competitive pricing and an increasingly diverse menu. The company’s system-wide sales grew 14% in July.

Macy’s, Polo, Kohl’s profits up, Penney flat
Department store chain Macy’s increased its earnings 64% in the second quarter from a year earlier. Same-store sales grew 6.4% while online sales were up 40%. Polo Ralph Lauren posted a 52% rise in first-quarter earnings and projects revenue growth in the high teens to low-20% range. Kohl’s reported a 17% increase in profits, but sales were up less than 4%, below analysts’ expectations. JCPenney had flat profits and lower sales, reflecting its departure from its catalog business.

Cisco Systems
Networking equipment maker Cisco Systems had a 36% drop in net income in its fiscal fourth quarter as a result of a $772 million restructuring charge. Its revenue rose 3.3% from the year-earlier period, higher than analyst expectations, and the firm’s CEO, John Chambers, said Cisco was making solid progress on turning its fortunes around.