Windows were padlocked on Wall Street this weekend as market composites logged their worst weekly losses since the beginning of the year.   Unemployment numbers came in uncomfortably higher than expected, sending markets into a freefall Thursday afternoon.   Despite a broad decline in equities, commodity futures continued their positive correlation with market indices, ending the week on a low note.   Once propped up by global demand, energy and grain futures’ descent signals an international economic slowdown.   More disconcerting, US companies once supported by global diversification could experience downward pressure on present and future earnings.   Additionally, any slowdown in corporate performance could yield further layoffs and higher unemployment.   Unfortunately, these indicators point to the elephant in the room, recession.   However, let’s not get too far ahead of ourselves, and see if we can’t pull some positive news from the wreckage.             

            On an encouraging note, with commodity prices heading lower, consumers should give a sigh of relief when filling up the gas tank, or checking out at the grocery store.   Furthermore, the US Dollar continues to ascend relative to its foreign currency pairs, strengthening the purchasing power parity of US consumers.   However, it remains to be seen if the recent improvement in the Dollar will result in a substantial long-term uptrend.   The ECB and Bank of England held interest rates firm this week.   Hence, the US economy will need to outperform the economies of Europe in order to improve the Dollar’s valuation against the Euro and Pound over the next quarter.     

            It seems every time the US markets falter, the Federal Government steps in to reassure investors.   After the close on Friday, the US Government announced the existence of a strategy to bail out mortgage lenders Fannie May and Freddie Mac.   On Sunday, US financial officials outlined the mortgage rescue plan to the public.   According to BBC News, the plan includes the following:   Providing liquidity to Fannie and Freddie until the end of 2009, purchasing mortgage backed securities, buying senior preferred shares of both companies, and replacing senior management.   In succession, the Federal Housing Administration will assume management of Fannie May and Freddie Mac.   Combined, both companies own or guarantee around half of the US mortgage debt, or $6 trillion.   Hence, to say supporting the two mortgage lenders is of high importance would be an understatement.   The failure of either Fannie or Freddie could result in international financial repercussions of catastrophic proportions.   As Treasury Secretary Henry Paulson stated, “Fannie May and Freddie Mac are so large and interwoven in our financial system that a failure of either of them would create great turmoil in financial markets here and around the globe.”   Therefore, the US Government was left with no choice but to throw a life raft to Fannie and Freddie in an effort to stem the bleeding.  

            Unfortunately, nobody knows how much liquidity the US government will need to provide the mortgage lenders before the housing market stabilizes.   However, we can safely assume the final sum will be sizeable.   Mr. Paulson stated that “there is no reason why taxpayers should have to directly foot the bill.”   Does this mean taxpayers will indirectly foot the bill?   Regardless of how the funds are generated, the Fannie/Freddie bailout could strike yet another blow to a beleaguered US economy.   More US Dollars will be needed, and further debt created.   A likely source of funds could be the issuance of more Treasury Bills, heightening US reliance on foreign aid.   Hence, the mortgage rescue plan may place downward pressure on the US dollar in the medium term.  

Hopefully the week ahead will provide better news for investors.   Key economic releases should shed more light on the current state of the US economy.   Fasten your seatbelts, as we could experience some turbulence.   Listed below are the significant global economic releases slated for the upcoming trade week.

Monday

GBP PPI Input, CAD Building Permits, AUD Home Loans and Retail Sales.

Tuesday

GBP Manufacturing Production, CAD Housing Starts, USD Pending Home Sales, OPEC Meets and Fed Chairman Ben Bernanke speaks.

Wednesday

NZD Monetary Policy, AUD Employment Change and Unemployment Rate, and ECB President Trichet Speaks.

Thursday

CAD Trade Balance, USD Trade Balance, NZD Retail Sales, and GBP Treasury Committee Hearings.

Friday

USD Retail Sales, USD PPI, and USD Preliminary Consumer Sentiment.