Weekly Focus: Lehman's One Year On

Global Update

It has been one year since the Lehman collapse triggered the worst financial and economic crisis since the 1930s' Depression. It has been a wild ride of initial chaos and subsequent surprisingly fast improvement.
The Fed's Beige Book, jobless claims and trade figures generally supported a picture of recovery. Weekly retail sales are also improving, but this is yet to be mirrored in the official monthly numbers.
German factory orders were strong on the surface but the details revealed a temporary boost from high military orders. German industrial production disappointed.
Chinese data was mixed. Growth in industrial production was stronger than expected in annual terms but the monthly changes show a loss of momentum. Retail sales remained robust while trade data disappointed.
Inflation has bottomed in Denmark and exports have clearly turned the corner.
Swedish inflation looks set to rise sharply from here.

Market movers ahead

US retail sales will be the mover of the week. The market is still waiting for signs of a pick-up in consumer demand in the US. Housing data, CPI and regional business surveys are also scheduled for release during the week.
In Euroland industrial production and German ZEW will be the main releases to watch out for. UK releases are retail sales and unemployment.
Norwegian general elections and Swedish unemployment data are on the agenda in Scandi.

Global update: Lehman - one year on

The devastating poker game

It is now one year since the collapse of Lehman Brothers, which filed for bankruptcy on 15 September 2008. It has been a year of an historic decline in economic activity and financial chaos. But it has also been a year of positive surprises once the crisis got ring-fenced and it became clear that another Depression would be avoided.

In many ways it was the misfortune of Lehman Brothers to be the second bank in a row to need government help. The first - Bear Stearns - was bailed out with the help of the Federal Reserve and the US Treasury. However, criticism of creating a moral hazard was widespread. Hence, bank #2 ran into problems, the decision was taken that the financial sector would have to come to the rescue. The mission failed in what has since been called the world's biggest poker game. The financial institutions were betting that the government would not allow Lehman to go bankrupt due to the substantial negative economic effects that would follow. The government was betting that the financial sector knew of the substantial financial values that would be destroyed very fast in the event of bankruptcy and that many of the banks could then be next in line.

None of the parties gave in and the bankruptcy became a reality - and indeed they were all proven more right than they had thought. The financial system broke down completely and the worst economic crisis since the 1930s' Depression followed. Financial institutions #3, #4, etc, in line for bail-out were bailed out due to the calamity it would otherwise have caused. The first one in line in the following week was the insurance company AIG. Quite clearly the cost of the ensuing rescue packages and of the economic value that was destroyed was many times greater than it would have cost to save Lehman. This is quite easy to see in the rear-view mirror but that the consequences would be so severe was beyond imagination before the collapse.

A quick turnaround in 2009

After a very tough start, the massive amount of rescue packages started to work and the improvement we have seen since early 2009 in credit markets and money markets has also been a surprise. Credit yields have fallen substantially close to the lows seen before the crisis broke out. Corporate issuance has been abundant as investors went from a strike in 2008 to queuing up to lend money to corporates through the credit markets. In fact, by August, corporate issuance was bigger than we have seen in any previous year. So the credit crunch in 2008 changed to credit abundance in 2009 to the benefit of companies financing through the credit market. The vast amount of liquidity provided by central banks has brought money market rates down close to pre-crisis levels after the sharp spike witnessed after Lehman Brothers. Economic data has also improved faster than most expected and equity markets have bounced more than 50% in the US. Hence the move away from the abyss came faster than anyone could have foreseen.

Still major challenges ahead

However, there are still major challenges ahead. The financial system is working better because it has been put in respirator by the authorities. At some point the respirator will have to be turned off. This process of exit will be challenging and is prone to risk of new damage. The fiscal bill of the rescue packages will also be a millstone for many years to come. The economic recovery looks set to turn faster than most expected but structural headwinds still blow from the need for deleveraging and the wealth destruction that has taken place. Unless the recovery feeds jobs and improves consumer confidence it may not last. Our forecast is that the immediate kick start of the economy will prove enough to turn the job market and that the recovery will be sustainable. But in many ways we are still navigating a minefield and there is no room for stepping on any of these mines.

Market movers ahead

Global

In the US the main event next week will be retail sales for August. There is no doubt that the headline number will be boosted by the surge in auto sales but focus will be on underlying sales. So far the trend in core sales has been marginally downwards since March, which is surprising since data on chain store sales has suggested a modest improvement. We look for an increase in core sales in August. Another round of housing data is due as well with the NAHB index, housing starts and building permits all expected to show continued improvement. On top of that, CPI and PPI data are likely to attract some attention. Regional business surveys from Philadelphia and New York (Empire index) will give more clues on the industrial recovery.
In Euroland the German ZEW expectations index will decline from 56.1 in August to 53.0 in September according to our model. The temporary setback mirrors a decline in the Sentix indicator. We expect that ZEW will resume its upward trend in the coming months. Euroland industrial production is likely to show a small decline (0.1 % m/m) in July. Industrial production increased 1.0 % m/m in Italy, but declined in both Germany and Spain and increased only slightly in France.

Scandi

The labour market survey in Sweden will give some interesting input to the state of the Swedish labour market.
In Norway it is time for general elections on Monday. The outcome is uncertain, but we doubt it will have any market impact.

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