Daily Insight

U.S. stocks snapped a five-day losing streak yesterday, a streak that sent the broad market 10% lower, on news China may be planning on substantially increasing its stimulus program. This allowed traders to get past preliminary labor-market reports that pointed to another large loss in payroll positions – the official jobs report for February will be released tomorrow.

Commodity prices, as measured by the Commodity Research Bureau (CRB), jumped the most this year on that speculation out of China – energy and basic material shares led the broad market as a result.


Market Activity for March 4, 2009

Crude oil jumped 8.5% to $45.16 per barrel, again as a result of the China story. However, that speculation has been dashed this morning as Chinese Premier Wen didn’t mention a word about increasing their stimulus plans in his address on the economy last night.


This China stimulus talk reminds of something we discussed a couple of weeks back. If Geithner was thinking more clearly, he would cut a deal with the Chinese – it seems the administration likes cutting deals, or at least attempting to; the effort to offer a deal with the Russians on Iran didn’t go over so well for those that have kept up on the issue.

Anyway, its seems that offering to stop calling China a currency manipulator (and I’m no Chinese apologists, I feel compelled to state this each time we talk about the Chinese, but look we live in a world of fiat money, all central banks are currency manipulators) in exchange for them upping their infrastructure stimulus package three-fold is a worthwhile action. This way we all benefit from the stimulus. We in the U.S. don’t have to engage in this exorbitant level of fiscal spending (and the damage this will do to the private sector as it saps resources), and by the way is scaring the heck out of business and capital as they know the result of all of this spending is higher tax rates. The Chinese may just be more than happy to play along as this means they are not pressured to take their currency completely off of the dollar peg and watch their exports fall as the production is moved to Vietnam or Thailand. Besides, they are likely to increase their stimulus plan anyway as they’ve got a citizen uprising issue that is growing.

Opportunity missed Mssrs. Geithner and Obama -- or maybe not deliberately, if you know what I’m saying.

Mortgage Applications

Mortgage apps fell for a second-straight week as home-owners wait for sub-5.00% to refi and purchases remain subdued, to put it mildly – this is a weak period for home purchases anyway, we’ll have to wait for May/June for a real sign of whether sales will bounce or not. The labor market will keep it depressed, but hopefully we see some rebound.

Refinancings will drive overall mortgage apps over the next several months as we think there’s a good shot the 30-year fixed mortgage rate will move below 5.00%. If it doesn’t occur more naturally, the Fed (whether right or wrong) will engage in activity to attempt to bring this to fruition.


Challenger Job Cuts Survey

The layoff report out of the nation’s premier outplacement consulting firm stated announcements of job cuts slowed in February, coming in at 186,350 from 241,749 in the prior month. Still, job-cut plans were 158.5% above the year-ago level.

The auto, industrial goods, retail and electronics sectors led the layoffs, or planned layoffs I should say.


ADP Employment Report

In another preliminary jobs report, the ADP employment survey anticipated that 697,000 payroll positions were shed in February – larger than anticipated and meaningfully lower than the January decline of 614,000. (The official number of job losses, as estimated by the Bureau of Labor Statistics, showed 598,000 jobs were lost in January – so ADP seems to be tracking the government’s figures closely).

Service-producing employment fell 359,000 last month, followed by a 338,000 decline in goods-producing industries – manufacturing job losses led the segment, falling 219,000, the worst monthly decline yet in this recession, and construction was down 144,000.

Employment was hardest hit in small and medium-sized businesses (those with fewer than 500 workers) as these firms slashed 576,000 jobs compared to a 121,000 decline at larger firms. Small-to-medium businesses are the main job creator in this economy and some of the policies that appear to be on the horizon will not treat this group kindly – this will make it more difficult, naturally, for the labor market to rebound.

Overall, the ADP report is just an estimate as to what we’ll see on Friday when the official numbers for February are out. Other indicators are also pointing to another large decline in payrolls though, probably the largest decline we’ve seen yet. That’s saying something since we’ve shed 2.4 million positions over the previous five months.


ISM Service Sector

The Institute for Supply Management’s service-sector index remained weak for February, coming in at 41.6 from 42.9 in January. The business activity index (which measures general sentiment among respondents) fell to 40.2 from 44.2 – while down, it is slightly above the fourth-quarter average of 38.9. (For clarity, the headline number – the 41.6 number – equally weights business activity, employment, new orders and supplier delivers; all sub-indices of the overall survey)


The especially important employment index rose to 37.3 from 34.4 (this is above the fourth-quarter average of 35.8).


The fact that this employment number improved is a good sign, although we have so many other indicators going against it – jobless claims, the two reports mentioned above and ISM manufacturing – it’s tough to find a silver lining. In any event, just maybe service-sector employment contraction has begun to slow. We’ll have a better idea of this on Friday when the big numbers are reported.

Have a great day!


Brent Vondera, Senior Analyst