The day’s economic data wasn’t enough to give the market a clear directive as the latest releases on housing and the service sector were not compelling.
The dollar moved significantly lower, with most of its decline occurring after the minutes from the latest FOMC meeting showed interest among some policymakers in expanding their mortgage-security purchase program. Print more dollars…well that’s so 1980s, they actually electronically deposit the funds into accounts. Either way it’s all the same, dramatically increase the supply of something and the price will trend lower.
Basic material and energy shares helped to buoy the market. The index that tracks material shares gained 1.52% and energy shares rallied 1.03%. Crude prices rose to the $83 handle even as the weekly energy report showed stockpiles increased 1.3 million barrels -- expectations were for supplies to fall 1.6 million barrels. Such a substantial difference would have normally sent crude price lower, but the lower dollar drove the trade in the pits.
Market Activity for January 6, 2010
Mortgage Applications
The Mortgage Bankers Association reported that its mortgage applications index rose 0.5% in the week ended January 1 after two weeks of large declines – apps slid 22.8% in the prior week and 10.7% the week before that.
Purchases rose 3.6% in the latest week after declines in the previous two weeks of 4.0% and 11.6%, respectively. Refinancing activity fell 1.6%, which also followed big declines in the prior two weeks – down 30.5% and 10.1%
The rate on the 30-year fixed mortgage rose to 5.18%.
Weak Moves into the Paint Get Rejected
You may have noticed the tariffs Washington is levying on Chinese steel. Well, the old Chinese may come back with a little counter of their own by further reducing their purchases of Treasury securities. The disturbing policy events just keep building; I don’t think Washington wants to get into this game of chicken right now. Picking trade fights is a very dangerous endeavor, especially so during a time of economic fragility – in addition it increases costs upon an already burdened consumer. But the degree to which such activity can adversely affect things is heightened that much more as we engage in massive deficit spending. The last thing we want is to do is something that may curtail future bids for government debt.
When the Fed fully completes their $1.25 trillion in mortgage-backed security (MBS) purchases that is going to reduce demand for government debt as well – as PIMCO has explained, they and others are selling their MBS to the Fed and buying Treasuries with the proceeds. The Fed’s printing press strategy is providing the demand for the Treasury market and keeping rates low. So that’s one demand source that will evaporate (if the Fed doesn’t come back and buy up even more MBS when housing runs into trouble again post April). Implementing policies, such as disputes with trading partners, that could cause other sources of funding to disappear will sting.
Some of you may have noticed that earlier this week China pulled a Dikembe Mutombo and stuffed U.S. attempts to levy sanctions on Iran – I’m sure the tariffs on Chinese steel made their decision that much easier.
ADP Employment Change
The preliminary employment report out of ADP, the business outsourcing solutions firm, estimated that 84,000 jobs were cut in December. This is quite a bit worse than what the market expects via Friday’s official jobs data, which is for no change -- and many expect a mild increase.
ADP has been off by a large margin lately, overstating the employment losses by roughly 100K per month on average since August, prior to that ADP was doing a pretty good job of predicting the jobs data when the labor market was in full-fledged freefall late-2008/early-2009. As a result of the degree of inaccuracy of late, I’m not sure what good the ADP numbers are right now, but we’ll go over them quickly nonetheless.
The Mortgage Bankers Association reported that its mortgage applications index rose 0.5% in the week ended January 1 after two weeks of large declines – apps slid 22.8% in the prior week and 10.7% the week before that.
Purchases rose 3.6% in the latest week after declines in the previous two weeks of 4.0% and 11.6%, respectively. Refinancing activity fell 1.6%, which also followed big declines in the prior two weeks – down 30.5% and 10.1%
The rate on the 30-year fixed mortgage rose to 5.18%.
Weak Moves into the Paint Get Rejected
You may have noticed the tariffs Washington is levying on Chinese steel. Well, the old Chinese may come back with a little counter of their own by further reducing their purchases of Treasury securities. The disturbing policy events just keep building; I don’t think Washington wants to get into this game of chicken right now. Picking trade fights is a very dangerous endeavor, especially so during a time of economic fragility – in addition it increases costs upon an already burdened consumer. But the degree to which such activity can adversely affect things is heightened that much more as we engage in massive deficit spending. The last thing we want is to do is something that may curtail future bids for government debt.
When the Fed fully completes their $1.25 trillion in mortgage-backed security (MBS) purchases that is going to reduce demand for government debt as well – as PIMCO has explained, they and others are selling their MBS to the Fed and buying Treasuries with the proceeds. The Fed’s printing press strategy is providing the demand for the Treasury market and keeping rates low. So that’s one demand source that will evaporate (if the Fed doesn’t come back and buy up even more MBS when housing runs into trouble again post April). Implementing policies, such as disputes with trading partners, that could cause other sources of funding to disappear will sting.
Some of you may have noticed that earlier this week China pulled a Dikembe Mutombo and stuffed U.S. attempts to levy sanctions on Iran – I’m sure the tariffs on Chinese steel made their decision that much easier.
ADP Employment Change
The preliminary employment report out of ADP, the business outsourcing solutions firm, estimated that 84,000 jobs were cut in December. This is quite a bit worse than what the market expects via Friday’s official jobs data, which is for no change -- and many expect a mild increase.
ADP has been off by a large margin lately, overstating the employment losses by roughly 100K per month on average since August, prior to that ADP was doing a pretty good job of predicting the jobs data when the labor market was in full-fledged freefall late-2008/early-2009. As a result of the degree of inaccuracy of late, I’m not sure what good the ADP numbers are right now, but we’ll go over them quickly nonetheless.
On the headline number, the 84,000 decline in private-sector payrolls ADP expects is the smallest rate of decline since March 2008.
In terms of industries, ADP has goods-producing sectors shedding 96,000 for the month, which is a significant deterioration (if accurate) as the official numbers had these payrolls down 69K in November. (Goods-producing, manufacturing and construction, jobs have shed 3.5 million positions over the past two years – most of which are permanently gone or will take a long time to come back. The auto sector alone has slashed 840,000 and construction 1.5 million. The auto jobs are permanently gone as the industry had been living with bloated expenses as if the Big Three had hopped into the DeLorian and traveled back to the 1950s; some significant percentage of construction jobs have been eternally extinguished -- until at least the next housing bubble arises, which will be a while. Of course, we could create – I don’t have a number, but a lot – of high-paying manufacturing jobs if we implemented a sensible energy policy that tore down omnipresent restrictions. But this appears to be heresy to too many people, so scratch that repulsive thought.)
The service-providing sector actually added 12,000 positions in December, according to ADP. This would also show deterioration as the official data had 58K added within the service sector in November.
We’ll see how it turns out when the Labor Department releases the figures on Friday. We’ve talked about how monthly job growth will emerge over the next few months, a point we first mentioned following the October jobs data. It may be a little too early to expect a boost in jobs for December, but February and March should be good to go for a positive reading. And expect some big numbers via government employment, especially as they add 2010 census workers. From there it will take 100K-plus per month for an extended period to slowly bring the jobless rate lower.
ISM Service-Sector
The Institute for Supply Management’s latest gauge of service-sector activity was pretty much a snorer, and failed to confirm a rebound has taken hold within the service-providing segment of the economy. The index came in at 50.1 (50.5 was expected) for December after slipping to contraction mode in November with its print of 48.7. The line of demarcations between expansion and contraction is 50.
In terms of industries, ADP has goods-producing sectors shedding 96,000 for the month, which is a significant deterioration (if accurate) as the official numbers had these payrolls down 69K in November. (Goods-producing, manufacturing and construction, jobs have shed 3.5 million positions over the past two years – most of which are permanently gone or will take a long time to come back. The auto sector alone has slashed 840,000 and construction 1.5 million. The auto jobs are permanently gone as the industry had been living with bloated expenses as if the Big Three had hopped into the DeLorian and traveled back to the 1950s; some significant percentage of construction jobs have been eternally extinguished -- until at least the next housing bubble arises, which will be a while. Of course, we could create – I don’t have a number, but a lot – of high-paying manufacturing jobs if we implemented a sensible energy policy that tore down omnipresent restrictions. But this appears to be heresy to too many people, so scratch that repulsive thought.)
The service-providing sector actually added 12,000 positions in December, according to ADP. This would also show deterioration as the official data had 58K added within the service sector in November.
We’ll see how it turns out when the Labor Department releases the figures on Friday. We’ve talked about how monthly job growth will emerge over the next few months, a point we first mentioned following the October jobs data. It may be a little too early to expect a boost in jobs for December, but February and March should be good to go for a positive reading. And expect some big numbers via government employment, especially as they add 2010 census workers. From there it will take 100K-plus per month for an extended period to slowly bring the jobless rate lower.
ISM Service-Sector
The Institute for Supply Management’s latest gauge of service-sector activity was pretty much a snorer, and failed to confirm a rebound has taken hold within the service-providing segment of the economy. The index came in at 50.1 (50.5 was expected) for December after slipping to contraction mode in November with its print of 48.7. The line of demarcations between expansion and contraction is 50.
With all of the talk about the V-shaped recovery, one would think ISM Service would be able to at least hit 52 and hold there – this is the average for the 2002 period, which was when the recovery from the 2001 downturn began and it was a weak one with just 1.95% GDP growth for the year. (When things really began to accelerate in 2003 – 3.85% GDP for the year – ISM Service averaged roughly 55.) Unfortunately, this data only goes back to 1997 so we can’t match against other expansions.The best part of the report came via the inventory measure, which moved to expansion mode for the first time since August 2008 -- just before the credit trouble deteriorated to crisis mode. The figure came in at 51.5 and does offer some hope that business confidence within the service sector improved.
Ben Gay
The FOMC released the minutes from their December 16 meeting but these notes are becoming less useful as the Bernanke Fed offers more updated messages via speeches. We’ve talked about this for some time and there is zero doubt that Bernanke uses speeches as his primary beacon with which to send the market signals as to their latest views.
The latest signals have come via the three speeches delivered early this week (Bernanke and Vice Chairman Kohn addressed the American Economic Association on Sunday and Fed Governor Duke followed up with her comments to the Economic Forecast Forum on Monday. They were all very dovish, expressing the need for policymakers to keep the emergency level of rates in place to support the financial sector, housing, and the economy in general.
The only additional news the minutes provided, as touched on above, was that a few policymakers favored increasing and extending asset purchases – and some people think the financial system, the housing market and economy have healed? Only looks that way because of massive support, the economic crutches the government has provided. If the economy were in normal recovery mode then would there be any discussion of extending quantitative easing (QE), policy that will make things much more difficult for when they do eventually have to unwind it all?
“It might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the large-scale asset purchases and continuing them beyond the first quarter,” as the minutes showed some FOMC members suggested. They don’t exactly sound sanguine. Rather, some members appear to be pretty worried what happens to housing and the banking system when the Fed stops buying securities.
For new readers I’ll repeat, the Fed is in a box. If they stick to the current QE (asset purchases) expiration they know yields will rise, another round of difficulty housing will endure and the likely damage to riskier asset prices. But if they extend QE for fear of this all the US $ will test its very near-term lows and possible the all-time nadir, commodity prices will continue to move higher and possibly unmoor inflation expectations. While nominal stock prices may continue to go higher for a while, even a stock market that is jacked up on easy money will have to respond to the other damages a ballooning Fed balance sheet (money printing) will have on longer-term economic conditions. It’s quite a quandary they find themselves in.
What is for sure, Helicopter Ben is living up to this pejorative name some have given him. (The name arose from his 2002 speech about deflation in which he stated the government can produce as many U.S. dollars as it wishes at no cost. Maybe a more appropriate term for Bernanke, if they do go and extend QE, is B-29 Bomber Ben – or more concisely put: Ben Gay.
Have a great day!
Brent Vondera, Senior Analyst
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