(This morning the Federal Reserve is leaking comments that six of the 19 largest banks will require additional capital. It’s clear what’s going on here: the government will use these stress tests as a way to force banks to participate in selling “troubled” assets into the PPIP, banks have previously said they don’t want to sell because the intrinsic values are higher than the price they’ll get in this market. But PPIP is dead anyway because private firms that will be on the buy side are scared. When they make big profits by using huge levels of government leverage they know what will happen – Barney Frank will drag them up to Capitol Hill and lambaste these firms in front of the camera as if they are the devil – why would they want to put themselves in this position. And then they’ll have their pay restricted and very likely see profits stripped – this is indeed a nasty road we’ve ventured along.)
Anyway, yesterday’s market losses would have been worse if not for better-than-expected economic reports. As we mentioned yesterday, a move back above -10 on the Richmond Fed Index would offer good support to the market and that’s exactly what the index did, rising to -9. That manufacturing survey improved nicely and the market responded to the news by erasing early-session losses. A better-than-expected improvement in the consumer confidence index, even if it remains extremely depressed and the job outlook aspect of the survey hardly improved, helped stocks as well – we’ll touch on this more specifically below.
In the end though, between incessant reporting on swine flu and the capital adequacy concerns, the negatives caused the slight momentum to fizzle in the final hour of trading.
Mid and small capitalization stock indices did end the session higher.
Market Activity for April 28, 2009
S&P Case/Shiller Home Price Index
The Case/Shiller Index for February measured home prices fell 18.63% from the year-ago period regarding the 20 largest metro areas tracked by the figure. This is an improvement from the year-over-year decline of 19.00% registered for January and marks the first month in which the index hasn’t made a new year-over-year decline since January 2007.
The decline in home prices within these 20 cities was a bit milder than expected due to vast improvement in the rate of price decline within the West region – this region dominates the index, making up nearly 35% of the index. In fact, price declines eased in 16 of the 20 cities tracked – price declines accelerated in the East Coast locations and Cleveland.
The largest improvements occurred in L.A., San Diego, Seattle, San Francisco, and Tampa – places where some of the most speculation took place and thus have the highest foreclosure rates. The plunge in prices within these areas over the past year (San Diego down 22.9%, L.A. down 24%, San Fran down 31%) has brought in bargain hunters, which has begun to put a floor in on prices. (They are still declining, but at a much lower rate and that at least is something to celebrate) The lowest fixed mortgage rates since the 1940s are also helping.
The month-over-month decline in the overall index improved to -2.17% from -2.80% in January. L.A. home prices placed the largest drag on the index from a month-over-month perspective, even though the rate of decline in prices among homes in that area eased. L.A. makes up 15.1% of the index and since prices fell 2.03% it subtracted 0.31% from the index. New York placed the second-biggest drag on the index; it makes up 19.4% of the reading and thus the 1.57% month-over-month price decline subtracted 0.30% from the index.
Consumer Confidence
The Conference Board’s consumer confidence index bounced off of the Feb./Mar. all-times lows, hitting a better-than-expected 39.2. Still, much improvement is needed to get the gauge back to the pre-confidence-killing September levels (roughly 60 on this index) and that will be the level to watch with regard to the overall index. Nevertheless, the bounce off of the record lows is a helpful sign.
The other important indicator to watch within this survey is the net jobs “plentiful” less “hard to get” figure, which barely moved from -44.1 in March to -43.4 in April.
As we’ve talked about a couple of times, it is unlikely that consumer activity will bounce back with the force it usually does coming out of recession – the Fed’s easy money policies of the past several years led to debt levels that are simply too much to handle with the unemployment rate rising to the highest range we’ve seen in 26 years. Therefore, we’ll need to have some confidence return by way of the job market (especially since slashing tax rates in order to boost disposable incomes is antithetical to the agenda of the current political class) before consumer activity can even mildly increase in a sustained manner. As a result, we’ll need to see this jobs “plentiful” less “hard to get” figure show meaningful improvement before one can expect the largest segment of GDP (personal consumption) to begin to boost GDP growth again. Until this figure makes a move toward -20, it will be up to the business side of things and that inventory dynamic we keep touching on.
Richmond Fed Manufacturing Index
The Federal Reserve Bank of Richmond reported that their factory gauge continued to improve in April and has completely bounced back to pre-September levels – this is a really good sign. While the index continues to illustrate factory activity within the central Atlantic region remains in contraction mode, the progress made over the past two months is showing the sector’s worst is behind it. The improvement we’ve seen from the latest regional manufacturing surveys (New York, Philly, Dallas and now Richmond) have been encouraging and this one is the most so.
The Richmond index jumped to -9 in April from -20 in March, bouncing from the doldrums hit late last year/early this year. Evidence of diminished weakness was also evident in all of the sub-indices, although the employment index barely budged.
New order volumes
The order backlog index jumped 22 points.
The average workweek jumped 23 points from the -30 registered in March all the way back to -7 for April. If we can get these manufacturing workweek numbers back to positive territory it will offer very encouraging signs the worst within the labor market has been seen.
We still need the ISM manufacturing index (the nationwide look at the sector) to officially confirm a rebound has occurred, which means that index will have to bounce into the 40s – it’s been stuck in the mid-30s.
This morning we get the first look at Q1 GDP, which is expected to show the economy contracted at a 4.7% real annual rate. This will follow the -6.3% reading of the fourth quarter, marking the deepest contraction since the 1981-82 recession.
We’ll also get the FOMC’s (the Fed’s monetary policy decision-making committee) rate decision as their two-day meeting comes to a close this afternoon.
Obviously, the Fed will not be cutting rates, as their benchmark interest rate is already targeted in a range of 0%-0.25%. So, what the market will be listening for is their comments on quantitative easing (will they speed up their purchases of mortgage and Treasury securities, actually increase the amount planned to purchase, or leave their plans unchanged?) and the progress made within the economic data – albeit tepid – over the past couple of weeks. That is, will they put the focus on the improvements seen within the PMI figures (another term for the regional manufacturing surveys) or the labor market that has yet to show signs of improvement via the jobless claims figures?
Our feel is they touch on the positives, but put the focus on the labor-market conditions. They’ll state that the economy has found a bottom but signs of an actual rebound (there’s a distinction between stabilization at depressed levels and a pure rebound) have yet to be seen. They’ll probably stay away from increasing their quantitative easing plans. We’ll see how close these guesses are to the FOMC’s actual decisions by 1:15 CDT.
Have a great day!
Brent Vondera, Senior Analyst
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