U.S. stocks rallied as better-than-expected results out of Bed Bath and Beyond fueled consumer discretionary shares, higher oil prices boosted the energy sector and the entire market was helped by a very successful $27 billion seven-year Treasury auction. All of these factors were able to offset a disappointing jobless claims report that showed the labor market remains very fragile.
News out of Bed Bath and Beyond helped ease concerns over the consumer, but we’ve seen this story before. Expectations shouldn’t get carried away here, heck even with the demise of competitor Linens ‘n Things the home-furnishing retailer couldn’t manage an increase in same-store sales – same-store results fell 1.6% -- but this is the market we’re in, sentiment sways on a daily basis.
Oil prices pushed above $70 per barrel on Nigerian pipeline attacks. For those who watch these things, this is a monthly, sometimes weekly, event. In a really strange way this could be looked at as another sign we’ve moved to a more typical recession – when the economic world was in free-fall the market had larger issues to deal with and ignored these attacks.
The seven-year Treasury auction went very well with strong foreign bidding and a super-strong bid-to-cover of 2.82. With the massive amount of debt issuance coming down the pike, these auctions, normally a non-event, cast some anxiety over the market these days. The last few have been market positive.
Stocks also benefited from what many viewed as a successful defense by Fed Chairman Bernanke of his emergency measures related to the Bank of America and Merrill Lynch deal – the conventional wisdom views that this increases his chances of keeping the position and the market probably doesn’t want to see a changing of the guard anytime soon (Bernanke’s term is up in January). I, on the other hand, am betting Bernanke will be gone as Larry Summers (Obama’s chief economic advisor) has the job in his sights and the Treasury may need an administration insider so they can monetize these massive debts. I’m not saying that’s a good thing, as we’ve spent much time talking about over the past couple of months this is a very concerning risk, but this is what is likely to occur.
Market Activity for June 25, 2009
Final Revision to Q1 GDP
The Commerce Department reported that first-quarter GDP was revised upward slightly to show the economy contracted at a 5.5% real annual rate during, up from the -5.7% previously estimated. The main reason for the higher revision was less drag from inventory liquidation. Now that all the data for the quarter has been collected, the Bureau of Economic Analysis showed that firms didn’t quite slash stockpiles as much as previously thought – although it was still the highest degree of inventory liquidation since records began in 1947.
In my view, the most interesting aspect of the final revision was how the personal consumption (consumer activity) figure has been revised down. When the initial estimate for the first-quarter GDP reading was released at the end of April, it had personal consumption up 2.2% at an annual rate, which was a good number particularly considering the state of consumer affairs in this environment. That figure followed two massive declines in consumer activity during the third and fourth quarters of 2008 (the largest consumer contraction since the 1980 recession).
Many believed the consumer was poised to bounce back in a sustained manner after that initial consumption number. Now that is has been revised down to 1.4% (in real terms at an annual rate) its shows the figure hardly bounced from the significant two-quarter contraction. Coming out of the 1980 contraction in personal consumption the figure roared back, printing readings of 4.4% and 5.4% in the following two quarters. This will not be the case this time. It will take a considerable period, to use a Fed phrase, before the consumer is in a position to push activity higher in a sustained manner.
Initial Jobless Claims
The Labor Department reported that initial jobless claims rose more than expected in the week ended June 20, rising 15,000 to 627,000 – economists had expected the reading to fall to 600,000. The four-week average of initial claims, a figure that takes out some of the volatility, rose ever so slightly to 617,250 from 616,750 in the prior week.
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.
The insured unemployment rate, the jobless rate for those eligible for benefits, held at 5.0% for a second straight week. This is good news as the historic data shows the overall unemployment rate tops out within a year of the insured peak being reached.
Have a great day!
Brent Vondera
News out of Bed Bath and Beyond helped ease concerns over the consumer, but we’ve seen this story before. Expectations shouldn’t get carried away here, heck even with the demise of competitor Linens ‘n Things the home-furnishing retailer couldn’t manage an increase in same-store sales – same-store results fell 1.6% -- but this is the market we’re in, sentiment sways on a daily basis.
Oil prices pushed above $70 per barrel on Nigerian pipeline attacks. For those who watch these things, this is a monthly, sometimes weekly, event. In a really strange way this could be looked at as another sign we’ve moved to a more typical recession – when the economic world was in free-fall the market had larger issues to deal with and ignored these attacks.
The seven-year Treasury auction went very well with strong foreign bidding and a super-strong bid-to-cover of 2.82. With the massive amount of debt issuance coming down the pike, these auctions, normally a non-event, cast some anxiety over the market these days. The last few have been market positive.
Stocks also benefited from what many viewed as a successful defense by Fed Chairman Bernanke of his emergency measures related to the Bank of America and Merrill Lynch deal – the conventional wisdom views that this increases his chances of keeping the position and the market probably doesn’t want to see a changing of the guard anytime soon (Bernanke’s term is up in January). I, on the other hand, am betting Bernanke will be gone as Larry Summers (Obama’s chief economic advisor) has the job in his sights and the Treasury may need an administration insider so they can monetize these massive debts. I’m not saying that’s a good thing, as we’ve spent much time talking about over the past couple of months this is a very concerning risk, but this is what is likely to occur.
Market Activity for June 25, 2009
Final Revision to Q1 GDPThe Commerce Department reported that first-quarter GDP was revised upward slightly to show the economy contracted at a 5.5% real annual rate during, up from the -5.7% previously estimated. The main reason for the higher revision was less drag from inventory liquidation. Now that all the data for the quarter has been collected, the Bureau of Economic Analysis showed that firms didn’t quite slash stockpiles as much as previously thought – although it was still the highest degree of inventory liquidation since records began in 1947.
In my view, the most interesting aspect of the final revision was how the personal consumption (consumer activity) figure has been revised down. When the initial estimate for the first-quarter GDP reading was released at the end of April, it had personal consumption up 2.2% at an annual rate, which was a good number particularly considering the state of consumer affairs in this environment. That figure followed two massive declines in consumer activity during the third and fourth quarters of 2008 (the largest consumer contraction since the 1980 recession).
Many believed the consumer was poised to bounce back in a sustained manner after that initial consumption number. Now that is has been revised down to 1.4% (in real terms at an annual rate) its shows the figure hardly bounced from the significant two-quarter contraction. Coming out of the 1980 contraction in personal consumption the figure roared back, printing readings of 4.4% and 5.4% in the following two quarters. This will not be the case this time. It will take a considerable period, to use a Fed phrase, before the consumer is in a position to push activity higher in a sustained manner.
Initial Jobless Claims
The Labor Department reported that initial jobless claims rose more than expected in the week ended June 20, rising 15,000 to 627,000 – economists had expected the reading to fall to 600,000. The four-week average of initial claims, a figure that takes out some of the volatility, rose ever so slightly to 617,250 from 616,750 in the prior week.
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.The insured unemployment rate, the jobless rate for those eligible for benefits, held at 5.0% for a second straight week. This is good news as the historic data shows the overall unemployment rate tops out within a year of the insured peak being reached.
Have a great day!
Brent Vondera
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