每日市场点评 --- February 5, 2008

All three major indices dropped around 3% for the day. After taking into account of yesterday’s loss, the market essentially gave back half of the recent gain since its lows touched back on Jan 22nd. The trigger of today’s plunge was a report that is often being paid little attention among investors. The Non-Manufacturing ISM survey for January came at 44.6, indicating a contraction in the service sector for the first time in almost 5 years while the market was expecting an expansion. Even worse, the three most important components of the survey were shockingly bad: Business Activity down 12.5 points to 41.9 compared with December and New Orders down 10.4 points to 43.5 --- both saw their first contraction since March 2003; Employment down 7.9 points to 43.9. As the service sector accounts for almost 80% of the US GDP, so a contraction in that sector will almost guarantee a recession, which is certainly a surprise given that just two days ago the ISM manufacturing survey provided the market with a rather positive picture of the economy. On the other hand, the prices paid by those being surveyed in the service sector remained at elevated level and 95% of the respondents reported higher or about the same costs compared to the previous month, indicating inflation is spreading across the economy and this will potentially complicate the Fed’s job in avoiding a potential recession. Interestingly, the US is not alone in having bad economic news today. A similar survey in the European Union today showed the slowest increase in the service industries in more than four years. In addition, the retail sales in that region dropped a record 2% in January compared to a year ago. The news sent stock markets across Europe to plunge and the euro had its biggest single day loss against the US dollar in almost 2 months, which in turn caused gold price to slide further after reaching a high of $940 just days ago. Treasuries rallied sharply following today’s weak economic news. The spread between two-year and ten-year notes widened to about 165 bps, a level not seen since Sep 2004. Currently the market has priced in a 75% chance of a 50bps cut in the next Fed meeting on March 18th and some are actually expecting another intra-meeting cut. As a side note, Australia’s central bank raised its benchmark interest rate by 25 bps to an 11-year high yesterday, citing the need to fight the fastest inflation since 1991. It looks like inflation is really a global phenomenon these days.