On the eve of Oil Dependence Day it was all about General Motors again. There’s an old saying from the 1940’s:
as General Motors goes, so goes the nation.
For America’s sake, I hope not. On the back of a dodgy ADP jobs report came a Merrill Lynch downgrade of GM. They put the stock on their “sell” list, saying that “bankruptcy was not impossible”. GM’s stock nose dived 15% and the equity markets followed suit as oil nudged above $145 a barrel .

For Fox New / CNBC tabloid TV pundits, we are now officially in ‘grizzly’ rather than “bear in the big blue house” territory.

Exploding Inflation
In view of J.C. Trichet’s warning yesterday of the potential for inflation to explode if they don’t act decisively now, it seems inconceivable that the ECB will not raise rates by 0.25% at 12.45 today. But where do we go from there? Well watch the language at the 13.30 press conference. Lets see if he uses the code words “strong vigilance” or “heightened alertness”. This would bake the cake on a further rate hike at the next meeting in August (they have declined their traditional summer holiday!) and would mark a radical shift in thinking within the council.

Recall that they have been back peddling since the last meeting, playing down the idea that they are about to embark on a hiking cycle. But the recent acceleration in Eurozone inflation to an alarming 4% must have them on the verge of pressing the panic button. Their view that the inflation beast will head back to its cave in 2009 is based on the assumption of commodity prices moderating. If they don’t moderate then the ECB council will have to push through 2 or 3 very damaging rate hikes, driving the entire Eurozone area into recession, in order to slay the beast of inflationary expectations.

If you haven’t come across the terms before, a ‘hawk’ or an ‘inflation hawk’ is someone who is particularly worried about the effects of inflation (and so prefers higher interest rates). The opposite is a ‘dove’, someone who thinks inflation is less damaging to an economy and prefers lower interest rates.

Something to note is that two of the more hawkish members of the current ECB rate setting council are being replaced over the next month. So is J.C. Trichet pushing through one rate hike now, knowing his slim hawkish majority is about to disappear?

It is probably worth recalling that the consensus forecast amongst economists at the start of this year was for the ECB to have CUT rates by 0.50 – 0.75% by end 2008!

Data on the Radar: Super Thursday
Well it’s probably the biggest risk day of the year. Probably a good day to speculate.

12.45 ECB Rate Hike (see comments above)
13.30 ECB Press Conference
13.30 Release of U.S. monthly Non Farm Payrolls (-60k expected)
15.00 U.S. Services ISM

The risk to the U.S. jobs number seems to me to be skewed to the downside today i.e. we may get a number showing the job losses on the month to be far higher than the consensus 60k. With the ECB press conference on simultaneously it is very hard to gauge how the markets will take this. Anyway the initial knee jerk reaction is often wrongheaded and more about (bad) bets being closed (VERY QUICKLY). So I find it best to sit on my hands for 30 minutes and digest the details.

For more about Super Tuesday have a read of Mr FT’s preview.

Equities: The Bear Necessities of Life
Well this Mole smelt that Grizzly quite a few weeks back. Slow growth, high inflation and falling earnings is a toxic mix for equities. The real bug bear is the inflation problem as this time around it’s being caused by things that Western Central Banks seem powerless to control i.e. surging commodity prices and the Emerging Markets turning for being a source of GOOD deflationary pressures to now being a source of BAD inflationary pressures for developed economies.

With oil hovering near all time highs again this morning the usual suspects are leading us down i.e. carmakers (Daimler) , airlines (Air France on a Deutsche bank downgrade) and of course financials (UBS – who else). German Dax is under particular pressure due to the fall in the Nasdaq last night. Remember the Dax has a much higher technology weighting than any other European bourse. Nvidia Corp (a maker of computer graphics chips) is off 23%.

But worth noting that stocks like ArcelorMittal (world’s largest steel maker) and BHP Billiton (world’s largest mining stock) are also under pressure today. Mmmm. Maybe people are having to cash in their chips on their winners to pay for their losers, or possibly these stocks have topped? The 15% drop in coal prices may also have something to do with it!

Finally there’s talk of Merrill Lynch selling non core business assets to raise much needed capital. The own hefty slices of Billionaire New York Mayor Michael Bloomberg’s business and Blackrock (the former private equity house).

Sleep with one eye open.