A more likely impetus behind the advance was day’s other economic release, the October trade figures, which, beyond showing that energy demand remains very weak, did illustrate pretty good discretionary spending.
Another factor may have been near-record wides in the yield curve (274 basis points between the 2s and 10s– just shy of the 275 record – and 355 bps between 2 and 30 – close to the record wide of 368). This spells continued strong interest income for the banks, and boy do they need all the help they can get by the way the coverage ratio looks – provisions set aside are hugely inadequate for the level of non-performing loans. According to the FDIC, that coverage ratio sits at 60%; the 15-year average is 140%.
Consumer discretionary shares led the gains, which gives at least some credence to the thought that the trade numbers helped investor sentiment. Utilities, health-care and energy shares were the other out-performers. Financials and basic material shares were the losers on the session.
Small caps continue to lag the broad market, which is usually a sign that a rally has become winded. The smalls peaked on October 14, about six weeks before the S&P 500 hit its post-March lows high-point. Since mid-October, the smalls are down 4.5%, while the S&P 500 is about flat.
Market Activity for December 10, 2009
Jobless ClaimsThe Labor Department reported that initial jobless claims rose 17,000 last week, rising to 474,000 – the reading was expected to fall by 2,000. This ends a five-week streak of decline but the reading remains nicely below 500K so that’s something to take a little comfort in. The four-week average fell 7,750 to 473,750.
Continuing claims slid 303,000 to 5.157 million, but the decline is meaningless as EUC (Emergency Unemployment Compensation – the jobless are moved to this program when their standard 26 weeks of benefits run out) claims more than offset that move by jumping 327,729. This shows that the move lower in standard continuing claims is more about the expiration of benefits (see chart immediately below) rather than from some level of job creation occurring.
The claims numbers continue to exhibit that the pace of firings has substantially slowed (as exhibited by the initial claims readings – possibly confirmed by the third month below 500K), yet firms are not yet adding net jobs (illustrated by the jump in EUC).
Trade Balance
The trade deficit narrowed in October by 7.6% to $32.9 billion from $35.7 billion in September. Exports rose 2.6%, while imports increased just 0.4%. I can hear it now, there will be economists exhorting that the lower value of the dollar is the reason and thus we should applaud the erosion in our currency. (A lower dollar means that U.S. goods are cheaper to the rest of the world and hence exports outpace imports. However, this doesn’t exactly work out in the longer term as well as the text books teach us because a weaker dollar causes a higher price of oil over time – and with our restrictions on domestic energy production we import a lot of petroleum products; this segment makes up 30% of imports.)
The narrowing appeared to be more of a domestic energy demand problem – not a surprise as office vacancy rates are on the rise and less people are driving to work. And the decline in crude imports, down 12% for the month, was not a function of a decline in prices – the price/barrel was down just 1.1%. In terms of barrels, we imported 32 million less barrels for the month of October – a 19.2% drop from the year-ago level. From the year-ago period crude imports are down 38.5%, even as the price of crude us up 48%.
Many categories posted some pretty good monthly readings though. Capital goods exports rose 3.7% -- fueled by an 8.9% increase in semiconductors, a 10.8% jump in computer accessories and a 2.2% rise in telecom equipment. On the import side, consumer goods were up 2.8% -- boosted by an 8.5% in pharmaceuticals. While this is more of a necessity product, clothing imports rose 5.5%, so there was a decent move from the discretionary aspect of consumer purchases. Autos also climbed 2.6%.
Outside of the significant drop in energy demand that continues the 14-month trend lower, U.S. consumer demand for other goods has shown decent improvement from very low levels.
Around the World
Australia reported that payrolls rose for a third-straight month, up 31,200 for November. Adjusting for population, this amounts to a 450,000 increase in U.S. terms (and payrolls are up roughly 1.4 million past three months). Last week we saw that Canada – another commodity-rich nation, particularly with regard to energy – posted a 79,000 increase in payrolls last month. Adjusted for population that’s a 790,000 increase in U.S. terms. This continues the theme that the commodity-laden economies of the world continue to post the best results
These countries can thank the Federal Reserve as it is their zero-interest rate policy that has the U.S. dollar just 6.5% above its all-time low; the path of the dollar both directly and indirectly is a major determinant of the price of commodities. Too bad we don’t aggressively remove production restrictions on our own energy holdings. This would be the most direct and effective way to create high-paying manufacturing jobs here at home.
Futures
Stock-index futures are up strong this morning on the heels of a higher than expected industrial production reading out of China. The figure jumped 19.2% in November on a year-over-year – the November 2008 reading it’s being compared to marked the cycle low. Even so, this is a large increase.
The growth in Chinese production over the past couple of months is commensurate to levels seen during 2003-2007; a period of robust consumption. Production is being driven by what is largely still a command-and-control government structure and history has shown, on several occasions, that such a political-economic system can lead to big trouble. I do wonder where exactly China is going to find the consumer activity to absorb all of these goods with global jobless rates double the levels they were just two years ago. Unemployment rates are still pretty low in Asia, but the region doesn’t have the domestic consumption to absorb this level of production as Asians’ propensity to save remains very high.
Have a great weekend!
Brent Vondera, Senior Analyst
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