U.S. stocks lost some ground Tuesday, trimming the S&P 500’s quarterly advance, as the latest manufacturing report illustrated activity remains in pretty deep contraction mode and the latest consumer confidence reading moved back below a key level. The Case/Shiller home price index showed some really nice improvement, still ugly but by far the best progress recorded thus far; however, it was not enough to offset the aforementioned drags.
Telecom, basic material, financial and industrial shares led the market’s decline. Consumer discretionary and tech were the relative winners. These are two of the three best performing industries for the quarter so maybe a little window dressing helped buoy those shares.
For the quarter, the S&P 500 jumped 15.22%; the Dow average gained 11.01%; and the NASDAQ Composite surged 20.05% after two quarters of treacherous descent (down 11.67% in the first quarter and 22.56% in the fourth for the S&P 500) and six-straight quarters that had sent the broad market lower by 50%.
Mid cap stocks, as measured by the S&P 400, jumped 18.23% and small caps, as measured by the Russell 2000, rallied 22.19%. Developed-nation international stocks leapt 26.82% and the emerging market index soared 33.57% (this marked the second quarter of increase for the emerging market group after back-to-back 27% declines; the index plunged 68% in 2008)
Market Activity for June 30, 2009
Prime Mortgages Continue to Show Cracks
The Office of Thrift Supervision reported that delinquency rates on prime mortgages more than doubled in the first quarter from the year-ago period. This is not exactly new information as rising prime default rates have been evident for some time, but thought it was worth a mention as this specific report is a new release.
Prime mortgages 60 days or more past due rose to 2.9% of such loans from 1.1% a year ago, according to this report. First-time foreclosure filings for these loans jumped 22% from the previous quarter. One can expect this number to jump again for the quarter that just ended. The Mortgage Bankers Association, which doesn’t provide a 60-day delinquency but does report a seriously delinquent (90-days+) rate had this number at 4.70% at the end of the first quarter. Their straight delinquency rate (just 30-days past due) is up to 6.06%.
And the modifications aren’t working out well either. Mortgages that have been modified to help struggling borrowers stay in their homes fail within the first nine months more than half of the time and increases to 63% after a year, according to the report.
It’s all about the job market. Those, and they are many, who have constantly exhorted that the housing market must come back before the overall economy can stage a rebound have it exactly backward. What is needed is a level of broad economic growth that brings back capital spending and pulls jobs along with it. This is why we harped on the need for aggressive broad-based tax rate reductions and higher current-year write-off allowances and bonus depreciation schedules last fall. This is the quickest route to labor market improvement, which is essential to a marked improvement in the mortgage market and home sales.
Case/Shiller
The S&P Case/Shiller home-price index registered another decline for April (yes, there’s a huge lag to this data), the 32nd straight monthly decline and the seventh-consecutive year-over-year drop of at least 18%. However, the figure recorded the most significant level of improvement since the respite from large monthly losses that occurred last summer.
(As always, I’ll repeat that there is a high likelihood that this home-price index overstates the downside. Roughly 40% of the cities captured in this survey witnessed the greatest level of speculation during the boom years. As a result, these are also the areas currently burdened with the highest foreclosure rates and thus the steepest price declines)
While the index recorded an 18.12% decline from the year-ago level, the measure fell just 0.56% for April and the three-month annualized rate of change fell to 18.18% after five-consecutive months of mid-20% declines.
This data is far from showing a rebound in housing is upon us, let’s face it housing isn’t coming back until the labor market shows significant improvement, but we may have finally gotten past these really large declines.
Eight of the 30 cities measured posted an increase on a monthly basis, last month it was only two. Dallas, Denver and Cleveland posted strong gains in April. Cities such as San Francisco, Boston, Atlanta and Seattle showed gains as well; while they were mild, it’s quite a shift from deep declines of the previous months. Even San Diego, Charlotte, Portland, Minneapolis and Tampa (areas that have shown some of the deepest contraction) posted more moderate declines.
Detroit, New York, Miami, Phoenix and Las Vegas remain pretty mired. These cities registered 1.5%-3.5% monthly declines and, save New York, posted prices declines of at least 25% from the year-ago period.
The recent increase in mortgage rates will add another challenge to the housing market for the next couple of months. The current 30-year fixed rate of 5.35% is certainly an extreme low from a historical perspective, but the market became attracted to that sub-5.00% level in late-April and May and we may find it difficult to extend on this improvement as a result of the rise in rates. Nevertheless, this latest reading is the best we’ve seen in quite a while.
Chicago PMI
The Chicago Purchasing Managers Index rose to 39.9 in June (a bit better than the 39.0 expected) from the May reading that saw the figure hammered back down to 34.9. All sub-indices managed to improve from the previous month’s level, but only the production component managed a move above 40, coming in at 41.6 from 37.3 in May. Employment was the laggard, rising but only to 28.9 – although this isn’t a surprise as this will be the last component to show meaningful improvement.
A rebound from last month’s reading, which was beaten back below the average reading of the deep level of contraction that took place in the previous two quarters, means nothing to me as the figure failed to make it above 40. As we discussed yesterday, no one should be under the illusion that Chicago is about to hit 50 (the break-even point, dividing expansion from contraction) due to the auto-sector woes, but still if a meaningful rebound in factory activity is upon us the measure should have been able to make it to 42-43.
We’ll get ISM (the nationwide factory gauge) this morning. The market expects the measure to rise above 43 for the first time since the economic world changed in September. It needs to hit 45 to show the next leg of improvement has really occurred. If so, it will illustrate that Chicago’s inability to move above 40 is solely due to the auto sector’s problems instead of an overall weakened state within the manufacturing arena.
Consumer Confidence
The Conference Board’s consumer confidence reading fell in June to 49.3 from the 54.9 hit in the previous month. (The overall is an average of respondents appraisals of current business conditions, business conditions six months out, current employment conditions and employment conditions six months out)
The present situation index moved back to 24.8, from an already low 29.7, on a less favorable assessment of business conditions and employment
The expectations index (for the next six month) fell to 65.5 from 71.5.
The jobs “plentiful” minus “hard to get” differential retreated to -40.3 from -38.1. This is probably the most important aspect of the report to watch as consumers will not feel right about things until they get a sense that the labor market has turned. (The differential is in the lower part of the chart below)
Have a great day!
Brent Vondera
Telecom, basic material, financial and industrial shares led the market’s decline. Consumer discretionary and tech were the relative winners. These are two of the three best performing industries for the quarter so maybe a little window dressing helped buoy those shares.
For the quarter, the S&P 500 jumped 15.22%; the Dow average gained 11.01%; and the NASDAQ Composite surged 20.05% after two quarters of treacherous descent (down 11.67% in the first quarter and 22.56% in the fourth for the S&P 500) and six-straight quarters that had sent the broad market lower by 50%.
Mid cap stocks, as measured by the S&P 400, jumped 18.23% and small caps, as measured by the Russell 2000, rallied 22.19%. Developed-nation international stocks leapt 26.82% and the emerging market index soared 33.57% (this marked the second quarter of increase for the emerging market group after back-to-back 27% declines; the index plunged 68% in 2008)
Market Activity for June 30, 2009
Prime Mortgages Continue to Show CracksThe Office of Thrift Supervision reported that delinquency rates on prime mortgages more than doubled in the first quarter from the year-ago period. This is not exactly new information as rising prime default rates have been evident for some time, but thought it was worth a mention as this specific report is a new release.
Prime mortgages 60 days or more past due rose to 2.9% of such loans from 1.1% a year ago, according to this report. First-time foreclosure filings for these loans jumped 22% from the previous quarter. One can expect this number to jump again for the quarter that just ended. The Mortgage Bankers Association, which doesn’t provide a 60-day delinquency but does report a seriously delinquent (90-days+) rate had this number at 4.70% at the end of the first quarter. Their straight delinquency rate (just 30-days past due) is up to 6.06%.
And the modifications aren’t working out well either. Mortgages that have been modified to help struggling borrowers stay in their homes fail within the first nine months more than half of the time and increases to 63% after a year, according to the report.
It’s all about the job market. Those, and they are many, who have constantly exhorted that the housing market must come back before the overall economy can stage a rebound have it exactly backward. What is needed is a level of broad economic growth that brings back capital spending and pulls jobs along with it. This is why we harped on the need for aggressive broad-based tax rate reductions and higher current-year write-off allowances and bonus depreciation schedules last fall. This is the quickest route to labor market improvement, which is essential to a marked improvement in the mortgage market and home sales.
Case/Shiller
The S&P Case/Shiller home-price index registered another decline for April (yes, there’s a huge lag to this data), the 32nd straight monthly decline and the seventh-consecutive year-over-year drop of at least 18%. However, the figure recorded the most significant level of improvement since the respite from large monthly losses that occurred last summer.
(As always, I’ll repeat that there is a high likelihood that this home-price index overstates the downside. Roughly 40% of the cities captured in this survey witnessed the greatest level of speculation during the boom years. As a result, these are also the areas currently burdened with the highest foreclosure rates and thus the steepest price declines)
While the index recorded an 18.12% decline from the year-ago level, the measure fell just 0.56% for April and the three-month annualized rate of change fell to 18.18% after five-consecutive months of mid-20% declines.
This data is far from showing a rebound in housing is upon us, let’s face it housing isn’t coming back until the labor market shows significant improvement, but we may have finally gotten past these really large declines.
Eight of the 30 cities measured posted an increase on a monthly basis, last month it was only two. Dallas, Denver and Cleveland posted strong gains in April. Cities such as San Francisco, Boston, Atlanta and Seattle showed gains as well; while they were mild, it’s quite a shift from deep declines of the previous months. Even San Diego, Charlotte, Portland, Minneapolis and Tampa (areas that have shown some of the deepest contraction) posted more moderate declines.
Detroit, New York, Miami, Phoenix and Las Vegas remain pretty mired. These cities registered 1.5%-3.5% monthly declines and, save New York, posted prices declines of at least 25% from the year-ago period.
The recent increase in mortgage rates will add another challenge to the housing market for the next couple of months. The current 30-year fixed rate of 5.35% is certainly an extreme low from a historical perspective, but the market became attracted to that sub-5.00% level in late-April and May and we may find it difficult to extend on this improvement as a result of the rise in rates. Nevertheless, this latest reading is the best we’ve seen in quite a while.
Chicago PMI
The Chicago Purchasing Managers Index rose to 39.9 in June (a bit better than the 39.0 expected) from the May reading that saw the figure hammered back down to 34.9. All sub-indices managed to improve from the previous month’s level, but only the production component managed a move above 40, coming in at 41.6 from 37.3 in May. Employment was the laggard, rising but only to 28.9 – although this isn’t a surprise as this will be the last component to show meaningful improvement.
A rebound from last month’s reading, which was beaten back below the average reading of the deep level of contraction that took place in the previous two quarters, means nothing to me as the figure failed to make it above 40. As we discussed yesterday, no one should be under the illusion that Chicago is about to hit 50 (the break-even point, dividing expansion from contraction) due to the auto-sector woes, but still if a meaningful rebound in factory activity is upon us the measure should have been able to make it to 42-43. We’ll get ISM (the nationwide factory gauge) this morning. The market expects the measure to rise above 43 for the first time since the economic world changed in September. It needs to hit 45 to show the next leg of improvement has really occurred. If so, it will illustrate that Chicago’s inability to move above 40 is solely due to the auto sector’s problems instead of an overall weakened state within the manufacturing arena.
Consumer Confidence
The Conference Board’s consumer confidence reading fell in June to 49.3 from the 54.9 hit in the previous month. (The overall is an average of respondents appraisals of current business conditions, business conditions six months out, current employment conditions and employment conditions six months out)
The present situation index moved back to 24.8, from an already low 29.7, on a less favorable assessment of business conditions and employment The expectations index (for the next six month) fell to 65.5 from 71.5.The jobs “plentiful” minus “hard to get” differential retreated to -40.3 from -38.1. This is probably the most important aspect of the report to watch as consumers will not feel right about things until they get a sense that the labor market has turned. (The differential is in the lower part of the chart below)Have a great day!
Brent Vondera
Activity in Crude
Also today we get the Chicago Purchasing Managers Index (PMI), which is the most watched factory gauge outside of the nationwide ISM figure. This reading has been more subdued than many of the other factory indices as it is most exposed to the auto sector. Due to those auto-industry woes we shouldn’t expect Chicago PMI to make it close to 50 (the line of demarcation between expansion and contraction) but if it moves to 42-43, this will be a big plus. Conversely, if the reading remains in the 30s the market will be disappointed and may sell off even if this is the final day of a big quarter.
On Wednesday we’ll receive the preliminary employment reports in the Challenger Job Cuts Announcement index and the ADP Employment Change reading. ADP is expected to show the economy shed 390,000 payroll positions in June, which is more than is expected for the official data.
We’ll also get that ISM number, giving us the June reading on overall manufacturing activity for the nation.
On Thursday, we’ll get an overdose of employment data as the usual jobless claims reading is released, but in a rare Thursday appearance (due to the market close on Friday) we’ll receive the official monthly payroll data (June) as well. The market expects a decline of 350,000 positions, and if accurate it will mark the second-straight month of improvement from the outsized losses of 550K-740K that was the trend over the previous six months. A level of 350,000 brings us back to the peak level of losses that are seen during the more typical recession, which is the situation we currently find ourselves.
This job number is the big one and will set the stage for how the market reacts as we come back from the July 4 holiday.
Personal Income and Spending
Even with the rise in spending last month, the jump in the savings rate is evidence that consumers have cut discretionary spending to the core. I am concerned that if gasoline prices rise much further this will be too much to bear – that release valve (as Daniel Ahn at Macroeconomic Research likes to put it) of cutting discretionary spending as a way to ease the outlays at the pump is no longer there.
Final Revision to Q1 GDP
Continuing claims, those on jobless benefits for more than a week, rose 29,000 to 6.738 million -- still down from the peak of 6.835 million hit a couple of weeks back, but very elevated. This shows that firms are not adding jobs, which should not be surprising as businesses want to see sustained gains in demand before doing so. This process may even take longer than normal as firms are very eager for their cost-cutting measures to flow through to the bottom line. First we must see some economic growth occur, which has yet to manifest itself.
Remember, last week was the first time continuing claims halted its record-setting run in 19 weeks. Some viewed this as a sign the labor market was on the cusp of bouncing back, but like commentary on a number of economic data releases of late, people get prematurely excited. We must see a trend emerge before making such calls, a multi-week move. In addition, we mentioned that last week’s decline in continuing claims may have been more a function of jobless benefits running out than one of laid-off workers finding employment – the exhaustion rate pretty much confirms this view.
Digressing for a moment, this development in the exhaustion rate does not bode well for credit-card delinquency rates, which will continue to be a challenge for the banking sector and consumer activity in general. Don’t be surprised to see the federal government extend, again, the duration of jobless benefits. Egad! This does nothing for economic growth. Sure, it calms the downside at the margin. But please, we need big bang pro-growth policies. An agenda that drive the tax rates on income, capital and corporate profits lower. A policy that increases current-year write-off allowance and the depreciation firms can record in the year of an equipment purchase – this jolts small business activity. These are the things that can get an economy flowing again. For now, however, we’re going to use government spending as the tool to revive growth – we’ll see how that turns out.
Durable Goods Orders
By region, the Northeast and Midwest saw new home purchases jump 28.6% and 18.6%, respectively. However, sales in the South (the region in which the most new-home sale activity takes place) fell 8.5%. On a non-seasonally adjusted basis, there were only 33,000 new homes sold in the U.S. last month – 3K in the Northeast, 5K in the Midwest, 17k in the South and 8K in the West.
However, the number of homes for sales (not adjusted to the depressed sales rate) has nearly been cut in half over the past 2 ½ years. When sales do bounce the inventory-to-sales ratio (months worth of supply) will fall in quick order, but this rebound in sales will have to wait for the labor market to come around.
Credit Spreads
The Problem of Conflicting Regulation