This market has some things tugging at it up here at the top-end of the range – the earnings season is showing some deterioration as we get more reports, data continues to show the labor market remains unusually fragile, there’s early concern Treasury auctions may put pressure on rates and overall conditions, while better, now match the worst we see during the normal recession – yet it remains resilient. This is probably a sign we’re going higher after some consolidation, but it’s a precarious economic situation and all it takes is one major report to come in worse than expected and we go meaningfully lower.
El-Erian of PIMCO says stocks are on a “sugar high.” Some find it tough to argue with this statement. Just like kids on a candy binge, one minute they are running wild, the next they’re crying themselves to sleep.
A 5% decline in the Shanghai Composite (our Tuesday night) is what led to the pressure stocks had to deal with yesterday. Speculation the Chinese government will put the clamps on bank credit – that’s laughable – led to concerns China’s growth will ease. This was most evident here at home by way of the commodity trade – copper down 2.27%, crude off by 6.40% and aluminum down 3.5% -- as traders feared Asian commodity purchases will slow.
Telecom, consumer staple and health-care shares were the winners yesterday. The other seven of the 10 major industry groups closed lower, with energy and basic material shares as the worst performers.
Market Activity for July 29, 2009
Mortgage ApplicationsThe Mortgage Bankers Association reported their index of mortgage applications fell 6.3% in the week ended July 24 as refinancing activity fell 10.9% with no help from the purchases side, which came in unchanged last week. On a year-over-year basis, the overall mortgage index is up 16.1%; purchases are down 15.1% and refinancings have jumped 73.3%.
The 30-year fixed-rate mortgage rose to 5.36% from 5.31% in the week prior.
Durable Goods Orders (June)
The Commerce Department reported that durable goods orders fell 2.5% ( a decline of 0.6% was expected) after the first back-to-back monthly increases in a year – the May figure was downwardly revised to show a 1.3% increase (initially reported as a 1.8% increase) and orders were up 1.4% in April.
On the bright side, orders for machinery and primary metals jumped 4.4% and 8.9%, respectively (and that machinery figure was up from a strong 7.3% rise in May). What dragged the figure lower was a huge 38.5% plunge in commercial aircraft orders (but this is a highly volatile figure so you don’t put much emphasis on moves in these orders, they rose 60% in May), a 2.5% decline in computers/electronics and a 1.0% decline in vehicle and parts.
The ex-transportation reading rose for a second-straight month, up a really nice 1.1% ( this reading beat the expectation of no change) -- and this is the number you want to focus on especially for months in which commercial aircraft records such large moves, either up or down. This increase followed a 0.8% increase in May – it’s down 22.2% year-over-year.
The best news out of the report was the rise in non-defense capital goods ex-aircraft orders (the proxy for business spending), up 1.4% in June following a 4.3% rebound in May, which was off of a tough couple of months in April and March. This segment is down 21.1% year-over-year, a collapse but up from the post-WWII record low of -27.1% in April. The three-month annualized figure is showing real improvement – up 0.4% (actually positive) in June after registering -15.5% in May and -30.6% in April.
We’ll have to wait to see, which is the appropriate approach with all of the data as some of these better numbers bounce off of deep lows, whether its for real or not. Even if it is only a bounce and not something longer lasting, it should provide that statistical bounce to GDP we’ve been waiting for by the third quarter.
The shipments figures have yet to respond, and this is what funnels into the GDP results. Durable goods (ex-transportation) shipments were down 0.5% last month, which followed a 1.4% decline in May. This should pick up on the heels of the May and June rise in orders, offering a boost to that Q3 GDP reading.
Fed’ Beige Book
The Federal Reserve released its report on economic conditions within each of its 12 districts – this survey covers the past six weeks leading up to July 20. I generally don’t spend much time on this as we go over these things on a daily basis, but here were some of their comments:
The survey showed that labor and real estate market conditions remained weak and credit conditions tight, but did involve some better news than the previous survey as most regions saw signs of the recession easing.
Most districts indicated that “the pace of decline has moderated since the last report or that activity has stabilized, albeit at a low level.”
Most districts also reported “sluggish retail activity” with Cleveland, Minneapolis and Richmond reporting deterioration in sales.
(I was going to make a comment on the Cleveland home-price data via Tuesday’s CasShiller Home Price Index reading. Cleveland showed the largest monthly increase (up 4.1%) of all of the cities covered, according to that report. I found this odd as we know that that region has been hit especially hard by weak manufacturing activity, particularly among auto and auto parts production. I refrained from stating this yesterday as my overall comments have been negative enough over the past few months, but with this statement out of the Beige Book thought it was worthwhile mentioning it today. I think what you take from this is the high probability that the recent home-price increases are short-lived, they’ll go down again before the eventual sustained move higher)
New York, Cleveland, Richmond, St. Louis, KC and San Fran reported weaker demand for some categories of loans. (This is something we’ve discussed on several occasions. A lot of people are watching the very positively sloped yield curve as a sign economic activity will erupt – normally a very good indicator. While banks’ ability to borrow low and lend higher will over time offer great incentives to boost the supply of loans, it does nothing for the demand side. If businesses and consumers do not have the desire, or ability, to borrow, this indicator is much less reliable in predicting the future path of growth)
Most regions indicated that labor markets remain very fragile as most regions either reducing positions or holding steady. Aggregate employment continues to decline. The report showed a preference among firms for part-time workers rather than full-time. (This means that the U6 unemployment rate is going higher, currently at 16.5% – U6 is the official unemployment rate, plus discouraged workers, plus those working part-time because they cannot find full-time work)
There were pockets of better conditions in the labor market, specifically in the health-care (only component not to show a cut in payrolls during this recession), tech and defense-driven aerospace.
The most downbeat aspect of the report covered the state of the commercial real estate market, as the weakness in this area worsened in eight of the 12 districts.
Have a great day!
Brent Vondera, Senior Analyst
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