Stocks did begin the session higher after the latest jobless claims data showed the previous week’s move below 500K on initial claims was for real and not an aberration. Unfortunately, what occurred within the continuing claims data showed the labor market remains conspicuously troubled – more on that below.
Utilities (two days in a row) and telecoms were the best-performing sectors, the only of the major 10 that posted gains on the session. Financials, basic material and energy shares led the declines.
The Treasury market declined -- quite unusual on a down day for stocks, although what’s abnormal seems to be the norm these days -- as the government stated it will sell $74 billion in notes and bonds next week. We continue to see strong demand for U.S. government debt so it shouldn’t be an issue. One does wonder how these auctions will go whenever it is that the Fed removes the emergency level of rates. For now banks are more than happy to buy up Treasury securities at nothing yields because they are borrowing from the Fed at zero and depositors at something barely more than that. However, when the ZIRP comes to an end, it seems these auctions may not go quite so swimmingly.
Market Activity for December 3, 2009
Jobless ClaimsThe Labor Department reported that initial jobless claims declined for a second-straight week, which pretty much confirms the big decline in the previous week was for real. Initial claims fell 5,000 to 457,000 in the week ended November 28, which follows the meaningful 39,000 decline in the week prior that pushed the figure below the 500K level for the first time since January. The current level of initial claims is the lowest since just before the chaos – mid-September 2008 – and finally has moved just below the peaks of the prior two recessions.
The four-week average of initial claims fell 14,250 to 481,250.
This data is a tale of two situations though as the continuing claims data rose 28,000 to 5.465 million.
This is the standard reading for continuing claims, a number that does not include the Emergency Unemployment Compensation (EUC) claims and its various extensions that elongate benefits from the traditional 26 weeks up to 99 weeks. EUC surged 265,300, the second-largest weekly jump since the program began in July 2008, to 3.85 million. When we add EUC and its various extensions (which total 597,688) to the standard continuing claims data, it is literally off the chart at 9.8 million.
So what does this data tell us? As we’ve been discussing, it shows that the level of firings has eased substantially, yet firms have not begun to hire. They will first have to see final demand push current payroll workloads to the stretching point, then add back in workers who have been idled (which is particularly the case within the manufacturing sector) before slowly beginning to hire new workers.
There is still a likelihood that monthly jobs gains, yes gains, may present themselves a few months out, but nothing substantial is likely to occur for quite some time. The fact that unemployment benefits have been extended to nearly two years (undoubtedly reduces the sense of urgency for segments of the workforce) and the signals from Washington that hiring the next worker is about to become more expensive are other reasons the jobless rate will remain high for an extended period of time.
ISM Non-Manufacturing
The Institute for Supply Management’s service-sector survey for November didn’t com in quite as good as their look at the manufacturing index (which we discussed on Tuesday). The reading moved back to contraction mode after spending two months just barely in expansion territory. The reading fell to 48.7 (51.5 was expected) after 50.6 in October as the business activity and supplier deliveries readings both put pressure on the overall index. The employment reading didn’t help much either as it was barely changed and remained well in contraction mode.
This is not a good sign for the nascent recovery, even the index’s rebound to expansion mode was hardly convincing as the move over 50 in the previous two months was negligible – 50.9 in September and 50.6 in October.
The highest unemployment rate in 26 years (and only the second time the jobless rate has hit this level in the post-WWII era) is putting the clamps on consumer activity. Further, the state of the labor market and household indebtedness is hurting business confidence as firms are less than optimistic a sustained rebound in consumer activity will present itself.
In terms of the sub-indices, the new orders figure remained in expansion mode, although it decelerated slightly to 55.1 from 55.6. However, the business activity reading (a measure of production – and of business confidence) fell back below 50 (49.6 after October’s 55.2) for the first time since July. The supplier deliveries reading fell to 48.5 from 50.5. The employment reading improved to 41.6 from 41.1, but as the number suggests shows the service sector continues to reduce payrolls.
The big aspect of this report that sticks out is that new orders remain in expansion mode (although a substantial recovery would have this reading in the 60s), while production moved back to contraction. This is yet another illustration that the inventory rebuilding process has yet to occur, retailers continue to draw down stockpiles. On the optimistic side, this means that we’re getting closer to production kicking up as inventory will eventually need to be boosted. The degree of near-term consumer activity will dictate the degree of inventory rebuilding.
Chain-Store Sales
Coinciding to the ISM number, the ICSC (International Council of Shopping Centers) showed that its chain-store sales figures fell 0.3% in November after two months of increase – a two-month bounce that followed 11 months of decline, exactly what ISM had shown. To clarify, chain-store sales are simply comparing results for same-store sales to the same period of a year ago.
The segments that showed sales increased last month were discounters (up 0.6%), drug stores (up 2.3%) and wholesale clubs (up 1.9%). The wholesale-club segment also offers an ex-fuel sales reading, which rose just 0.1% and ends what looked to have been an emerging trend of 4% year-over-year gains.
The segments that declined were apparel (down 0.4%), department stores (down 4.5%) and luxury (down 6.9%). Luxury has been completely hammered since the credit crisis went into full tilt 14 months ago. Last month’s 1.8% increase looked as though the segment had turned the corner, but apparently not.
The fact that same-store sales remain shaky, unable to trend higher even compared to the year-ago period when economic malaise was in full effect, vividly illustrates the state of the consumer.
Bernanke Confirmation
The Fed Chairman endured quite a raucous confirmation process yesterday (President Obama nominated Mr. Bernanke for a second term in August but Congress has to confirm and that may not come before Christmas) and it wasn’t just the normal circus that is usually on display when politicians find themselves in front of the cameras. There were actually legitimate policy criticisms exhorted.
Unfortunately, the bulk of the serious and informed questions centered around how the Fed was negligent in regulating excessive risk-taking within the financial industry. That is certainly a fair shot at Bernanke & Co., but the session seemed to almost completely ignore the specific policymaking errors -- the very damaging mistake of keeping short-term rates too low for too long in the period 2002-2005. And here we are again, even lower this time. We’ll see how it turns out. (I must qualify this statement by saying the Fed had no choice this go around, but they continue the emergency level of rates and signal ZIRP will remain in place for an extended period.)
But for that period earlier in the decade, if not for that very aggressive easing campaign (fed funds was below the rate of inflation for three full years, which means you’re going to get a lot more leverage among institutions and consumers, and the risk taking that results) the fuel that sparked the credit bubble would have never doused the financial system in the first place. That is what we really need to be focusing on.
And then there is this, a thought I’ve had for several years now: It’s not a stretch to ultimately blame this entire event on the 9/11 attacks; the Fed would have never gotten so aggressive absent that event.
This is not to take Greenspan and Bernanke off the hook, it was stupid as stupid can be to move fed funds all the way down to 1.00% especially as late as they did – didn’t get there until June 2003; the economy had already been in expansion mode for all of 2002, even if it was low growth of 2.0%. And they compounded the problem by leaving fed funds at 1.00% for an entire year, even as 2003 GDP grew at 3.8%, and didn’t get fed funds back above 3.00% until the summer of 2005. This is the key element that created the housing and overall credit bubble. But if we were not attacked by the scourge of the earth, or we had placed ourselves in a better position to thwart that attack, the heavy stock market decline the Fed was obviously focused upon would not have ensued (and I’m not referring to the 22% decline in the year following the bursting of the tech bubble, but the second leg tumble of 27% that was clearly driven by the 9/11 event and the economic uncertainty it created) – thus I really doubt the fuel that created this mess would have been released by the Fed.
Anyway, Bernanke will be confirmed, but not without a heck of a lot of justified criticism.
Jobs
Payrolls grew by 79,000 in Canada last month, marking the third month of increase out of the last four. Just as Australia has shown, the resource-rich economies are performing much better than the rest of the world – they can thank global central banks actions, specifically our Fed as the policy has put pressure on the dollar and driven commodity prices higher, for this help. We also live in a country that is resource rich, too bad that we set a vast majority of these resources off limits. It’s an act of insanity; we could be producing tons of high-paying manufacturing jobs if we would just think practically.
In about an hour we’ll receive our employment report for November. It is expected to show payrolls declined for a 23rd straight month. We will need to see the average workweek rise from the current all-time low and temporary hiring trend higher. Those will be the key signs that job losses will move to statistically insignificant levels and then to mild monthly job gains in the near future.
Have a great weekend!
Brent Vondera, Senior Analyst
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