Stocks began the session lower after two preliminary jobs reports suggested the official employment survey for March will show a decline that’s even worse than the 650,000 loss for February. The broad market fell roughly 2% in early trading, but rallied when those factory and housing reports were released at 9:00CT.
I’m still a bit skeptical manufacturing and housing has troughed. For manufacturing, we’ll still have the auto sector weighing on things and production levels for the industry will likely decline from here.
On housing, as we mentioned when the existing home sales data for February was released, we need to think about the weather-related event. Conditions were harsh for most of the country during January, which is why we saw one of the worst monthly sales declines during this contraction for that month. Conversely, weather was very mild in February, which brought people out to hunt for homes; in addition, the bounce in February was also a function of things snapping back from that 12-year low in existing sales in the prior month (the level of sales remains below where it was in December). Odds are we have seen the worst, but it’s just too early to tell right now, especially with the labor market in the condition it is in. More on this below.
Telecom, basic material (commodity-related stocks), financials and tech shares all performed very well yesterday. Utilities and health-care were the laggards.
Market Activity for April 1, 2009
Economic Releases
Mortgage Applications
The Mortgage Bankers Association reported its mortgage apps index rose for a fourth-straight week as refinancing activity increased and purchases didn’t weigh on the figure – purchases were virtually flat relative to the prior week.
Mortgage rates remain extremely attractive, the 30-year fixed rate hit 4.61% in the week ended March 27 (although the actual rate is a bit higher as it includes fees) and this should keep refis going, albeit at a lower pace coming off of the very strong bounce of the previous couple of weeks. Purchases will continue to be held back as a result of the very weak labor-market environment, although the super low rates will help to ease this drag.
Challenger Job Cuts Announcements
The Challenger Job Cuts report, a survey out of Challenger, Gray and Christmas – the country’s top outplacement consulting firm, stated job cut announcements by U.S. firms nearly tripled in March from the year-ago level.
Firing announcements jumped 181% to 150,411, compared with 53,579 in March 2008 – employers in state and local government along with nonprofit organizations led the increase. The financial and industrial goods sectors showed a nice easing in layoff announcements – that’s a really good sign that should have received more attention that it did.
ADP Employment Report
The ADP Employer Services gauge (Challenger and ADP are always released two days prior to the official monthly jobs report) came in at a larger-than-expected decline for March, suggesting 742,000 payroll positions were shed in March. We get the official reading from the Bureau of Labor Statistics on Friday and a loss of 660,000 positions is the consensus expection. The ADP figure has been an accurate indicator of the official reading over the past six months (understating the loss a bit actually, but very close).
We figured to be headed for a 650,000 loss in payrolls for March based upon jobless claims and ISM employment readings, but this ADP report may be saying a number above 700K is more likely. Expect the unemployment rate to hit 8.5%, which would be a 25-year high.
Medium-to-small sized businesses continue to cut the most jobs. Firms with 50-499 employees slashed 330,000 positions last month, according to ADP. Firms with fewer than 50 employees cut 284,000 positions. Large firms eliminated 128,000 jobs.
ISM Manufacturing
The Institute for Supply Management stated its manufacturing index rose slightly in March, coming in at 36.3 from 35.8 in February. The fact that the figure remains below 50 means that factories continue to trim output but the bounce from the 28-year low may be a signal of a bottoming process. If we can get this improvement to extend into the low 40s that will signal we’re onto something. The question really is the degree to which auto-industry woes will continue to weigh on the sector. Nevertheless, business spending on electrical and heavy machinery equipment may be enough to more than offset the auto weakness.
The new orders index was the real bright spot and hopefully this indicates a manufacturing rebound will occur over the next couple of months. The sub-index of the report jumped to 41.2 in March from 33.1 in February. This segment has been in contraction mode for 16-straight months (and remains that way since its takes a reading of 50 to mark expansion). But this is a nice improvement from the all-time low hit in January and looks to illustrate we’ve hit a bottom – cautious optimism.
The ISM employment index rose slightly from the all-time low hit in February.
In two other reports:
The National Association of Realtors stated pending sales for existing homes rose 2.1% in February, which suggests March existing home sales may show an increase. However, this pending number tracks contracts that are signed (actual existing sales count when a contract is closed) and since we’re in an environment in which borrowers have run into trouble between signing and closing the pending figure has not been as accurate as usual.
And finally, the Commerce Department stated construction spending fell 0.9% in February (the sixth-month of decline), led by a 10.9% drop in private-sector residential construction. Private-sector commercial activity rose 0.5%, the first increase since November. Public sector construction spending, which will clearly drive the overall reading over the next year at least, rose on both measures. Public residential construction rose 2.2% and public commercial was up 0.8%.
This morning all eyes will be focused on the initial jobless claims report. Stocks index futures are up big this morning and a worse-than expected jobless claims print may erase this euphoria.
No doubt we’ve got performance chasers rushing in as the S&P 500 has jumped 22% from the nefarious low of 666 of March 9. The market seems to have priced in a 700,000 payroll decline for March and is looking past last month’s data and to April and May, which is why the jobless claims figure is so important. If this morning’s jobless claims reading comes in meaningfully worse than expected stocks will sell off – a super bad jobless claims reading will suggest big job declines will continue for April. On the other side, if claims come in much lower than expected, stocks will be off to the races – kind of obvious I know.
Overall, in order to get really excited about the labor market, specifically with regard to the worst being behind us, we need to see jobless claims trend back to the 500,000 handle and I don’t see much evidence of this just yet – but that’s what you look for.
Have a great day!
Brent Vondera, Senior Analyst
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