The market is in a gray area here, a state of confusion you might say, as the S&P 500 has traded in a tight range of 880 as the support and 925 as the resistance, just ahead of the 930 wall, over the past 20 sessions. I’m thinking very near term economic data is going to push us below that 880 level but it’s pretty clear that those who have not participated in this rally from the March 9 flagitious low of 666 are holding things up as they want in on the action.
Word that the Fed will boost their purchases of Treasury securities encouraged buying within the market place, full blown monetization of government debt is very likely but that’s another story. A $26 billion seven-year auction also went swimmingly, helping the Treasury market to rally and financials went along for the ride as the worry over a spike in rates eased, for now. One could say this is also why energy stocks jumped, the Fed’s actions will drive the dollar lower over time and that means higher commodity prices.
Treasury auctions are going to be more important than ever due to both fiscal and monetary policy decisions. A big test for this market will be the 10 and 30-year auctions scheduled for June 11 and 12, assuming Monday’s personal spending figure doesn’t blow a hole in the floor.
The day’s economic data was certainly no help; as we touched on yesterday, the market is holding up remarkably well considering what we’re seeing – more on the data below. Beyond the strong session for energy and financials all major industry groups, save consumer discretionary, closed to the plus side.
Market Activity for May 28, 2009
Jobless Claims
The Labor Department stated initial jobless claims fell 13,000 to 623,000 for the week ended May 23, beating the expectation by a bit, which was for a move to 627,000.
The four-week average fell 3,000 to 626,800.
Continuing claims made the 17th straight record high in the latest week, jumping another 110,000 to 6.788 million.
The insured unemployment rate, the jobless rate for those eligible for benefits, rose another tick to 5.1% -- the highest level since December 1982 when the post-WWII record unemployment rate of 10.8% was hit . This rate closely tracks the direction of the overall unemployment rate and you can expect it to blow past 9% when the May jobs report is released in a week.
This real-time data is illustrating there’s very little improvement within the labor market. We should not see a number like the 740,000 in payroll losses posted in January but a range of 530,000-600,000 appears to be in the cards for a couple of months still.
This level of losses cannot go on for much longer, although the auto-industry woes may make it a reality for longer than one would think possible, but it appears it may be a while before we move back to 300,000 in monthly job losses, which was the peak range for the last two recessions and the 2001 downturn.
Durable Goods Orders
The Commerce Department released their latest durable goods report, which showed orders rose 1.9% in April after a huge downward revision to the March data. The 1.9% bounce follows a 2.1% decline in orders for March (previously reported as a 0.8% decline). Durables were driven by a 2.7% increase in the vehicle and auto parts component and machinery orders – problem is we’d like to see something other than autos driving the reading because we know it’s not going to be of help over the next couple of months as auto plants will be idled.
Durable goods have endured the worst contraction in orders since the late 1940s.
Excluding transportation, orders rose 0.8% after a 2.7% decline in March – this number was revised down big time too, initially reported as a 0.6% decline.
The non-defense capital goods ex-aircraft component (a proxy for business spending) registered another large monthly decline, down 1.5%. On a three-month annualized basis, the decline has improved nicely, down 28.6% compared to the -44.2% last month that was affected by the massive 12.3% plunge in business spending orders during January. Needless to say, this rate of decline, while improved, shows businesses are still in a mode of heavy caution.
On a year-over-year basis, business spending is down 26.4%. This is the number to watch as we desperately need the business side of the economy to pull us out of this situation since the consumer will need additional time to get their bearings again. Unfortunately, the government has inserted itself as the economic driver. The consequence of this decision will be a crowding out of private sector activity as capital will be sapped via higher tax rates and debt purchases as result of the outsized deficit spending.
New Home Sales
The Commerce Department released new home sales for April, showing activity rose 0.3% to 352,000 units at an annual rate – the expectation was for sales to hit 360,000. This follows a 3% decline for March. New home sales are down 34% from the year-ago period. The record low of 329,000 units was hit in January, which was 76% below the peak hit in July 2005.
The lowest mortgage rates in 60 years and tax credits to first-time buyers have helped sales stabilize, albeit at the lowest levels since 1982.
The median price of a new home actually rose 3.7% last month, coming in at 209,700 – the figure is down 14.9% over the past year.
The number of new homes available for sale remains below the long-term average. This signals that the inventory to sales ratio will plunge once sales rebound in a significant way. The issue in the near term is the labor market, as we discussed yesterday; home sales don’t have much of a chance until job losses ease. Beyond that, sales will still have to fight headwinds as current fiscal and monetary policy will eventually drive interest rates higher.
On that inventory/sales figure, the supply of new homes relative to the rate of sales, the trend is moving in the right direction at least.
Delinquencies
In a separate housing market report, the Mortgage Bankers Association stated delinquencies as a percentage of all mortgage loans jumped again in the first quarter to 9.12%. This reading includes loans that are at least 30 days late. The delinquency rate among prime loans hit 6.06%; for subprime loans the rate hit 24.95%.
The percentage of seriously delinquent loans, those 90 days late, hit 7.24%, which means the foreclosure rate will rise – as of the first quarter that foreclosures made up 3.85% of all mortgage loans..
Today’s Data
This morning all eyes will be on Chicago PMI, a measure of factory activity in that region. Yes, we’ll get the first revision to Q1 GDP, which will get attention, but that Chicago reading will be the big one. The number made really good progress last month from a very low reading of 31.4 in March. The market will need to see progress continue, making its way to the mid 40s – a reading below 50 marks contraction but a solid move into the 40 handle will be enough to excite people.
Have a great weekend!
Brent Vondera, Senior Analyst
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