When investors get stoked about growth, basic materials, energy, financial and tech lead the charge and that’s what happened yesterday. Safe havens such as health-care and utilities were the under-performers, but managed some upside as all 10 major industry groups gained ground.
The dollar lost ground, ending a four-session winning streak. There haven’t been many sessions when both stocks and the dollar have advanced, as the only thing that helps the old greenback these days is worry – the run for safety.
Volume was weak again as only the more negative sessions have brought volume to normal levels. Roughly 990 million shares traded on the NYSE Composite yesterday, 15% less than the six-month average.
Fourth-quarter earnings are holding up reasonably well, although you’d think firms could muster something more by the way they’ve slashed expenses via payrolls (it’s another indication that this is not a normal rebound – but then again the recession wasn’t normal, being a balance sheet, or credit-induced, economic downturn rather than the typical cyclical sort). Ex-financial profits are up 14.7% with 40% of S&P 500 members in thus far. That’s down from 21% at this time last week, but it’s holding double-digits so we’ll take it.
Market Activity for February 1, 2010
Personal Income and Spending
The Commerce Department reported that personal income rose 0.4% in December (+0.3% was expected) following an upwardly revised 0.5% (initially printed as a 0.4% rise) in November.
The segments of the report that really matter, compensation and wage and salaries from private industries, rose 0.1% each. Goods-producing industries’ payrolls decreased $5.2 billion after a $2.9 billion increase in November. On a percentage basis, this segment saw wages and salaries fall 0.5% for the month. Service-providing industries increased payrolls $11.5 billion after a $22.3 billion increase in November. In percentage terms, this segment saw wages and salaries rise 0.3% in December. Over the past year, total private-sector wages and salaries are down 3.1%.
Other private-sector components:
Proprietors’ income rose 0.8%, fueled by an 18.7% rise in farm income; nonfarm proprietors’ income rose 0.2%. Personal income from assets rose 0.6% in December -- interest income was unchanged for a third-straight month and dividend income rose 1.8%; interest income is down 3.9% over the past 12 months and dividend income is off by 14.8%. Rental income rose for an eighth-straight month (clearly helped by volume as more people are pushed into renting, not from higher rents as those have been falling – still this number appears off as we know vacancy rates are elevated). The figure rose 0.7% for December and is up 21.1% year-over-year.
Again, government transfer payments helped the income figure advance as they rose 0.6% in December and are up 13.7% over the past year. Government spending continues to help personal consumption account for 72% of GDP. As we’ve mentioned on a number of occasions, that component is going to move back to its historic average of 66% over time – the government can’t keep this level of spending up forever and households need to pare debt-to-income ratios. Government transfer payments as a percentage of disposable income continues to hover near the record high hit in August – the record is 20.2%, it came in at 19.5% for December.
On the spending side, personal consumption rose 0.2% after a strong 0.7% increase in November – a gain of 0.3% was expected, but the prior month’s reading was revised up by more than this miss. Spending for goods fell 0.4% as durable goods rose just 0.04% and consumption of nondurables fell 0.6%. Consumer outlays for services rose 0.5%.
The cash savings rate (a percentage of disposable income) rose to 4.8% in the final month of the year, up from 4.5% in November. This number will continue to trend higher as the damage done to stock and home prices along with consumers’ uncertainty regarding the job market and less access to credit will usher in a another cycle of cash savings. The figure won’t necessarily increase each month, but I believe it will get to 6.0-6.5% and hold there for a couple of years – past that point it will depend on interest rates, the higher they go the higher the cash savings rate will climb. The 50-year average is 7.0%.
The inflation gauge that is tied to the personal income and spending data (known as the PCE Deflator) is up 2.1% over the past year. This remains a benign level of increase, but it is a pretty dramatic shift from the five-straight months of decline that ran May through September.
ISM ManufacturingThe Institute for Supply Management’s factory index jumped to 58.4 in January (highest reading since August 2004) from 54.9 in December. The estimate was for a print of 55.5. A reading above 50 marks expansion and anything close to 60 suggests pretty robust activity. Breadth looked good as ISM stated 13 of the 18 industries they track reported growth, that’s up from nine in December.
New orders remained hot, accelerating to 65.9 from 64.8; backlog of orders jumped 6 points to 56.0; supplier deliveries is running hot now, hitting 60.1 from 56.8; employment rose to 53.3 from 50.2 – a meaningful print above 50 so let’s hope we get some manufacturing employment pick up, but don’t expect it just yet.
The inventory data remains in contraction mode, but improved to 46.5 from 43.0 – this is above the 25-year average of 44.7.
Customer inventories fell to 32.0 from 35.0 -- this is the lowest reading for the segment on record (although data on this one only goes back to 1997); it says that respondents believe their customers’ inventory levels are too low. This is good in terms of expecting a large inventory build, and a substantial catalyst for GDP. However, in this time of heightened business caution it may also suggest that firms will keep stockpiles at very low levels until they see a durable uptrend in end demand – until the jobless rate moves down to at least 8%, which is above the high point during the normal recession, a sustained upward trend in end demand remains quite precarious.
Price paid by factories is getting hot again, shooting up to 70.0 from 61.5 in the prior month. If firms don’t have an ability to raise prices, then this event is going to hit margins and that also increases concerns that job growth will be too tame to bring the jobless rate lower – adds just another uncertainty onto the shoulders of business decision makers. Adjusting for the wild swings over the past 15 months or so (the highs on the prices paid index put in during 2008 due to the commodity-price spike and the lows put in due to the collapse of business activity in early 2009) prices paid has averaged 62.3 over the past 10 years.
In summary, this was a very good report and this activity should help to foster at least some manufacturing job growth a few months out. Still, this is a function of the inventory swing, a mild build in stockpiles (boosted by auto assemblies) from record levels of inventory slashing during the previous quarters. Not to beat a dead horse, but end demand remains crucial and firms have to have more confidence about the future if we’re going to see a meaningful degree of hiring to ensue.
Construction Spending
Finally, in the final release of the day the Commerce Department reported that construction spending fell for a 13th time over the past 15 months, down 1.2% in December. Residential got clocked, falling 2.7% for the month and down 10% over the past year. Nonresidential, the commercial side, fell 0.5% and is down 9.8% over the last 12 months.
The overall reading would have been worse if not for the 1.1% increase in public sector residential construction. For all of 2009, construction spending declined 12.4%. Private sector spending fell 18.8%, while government construction spending rose 3.7%.
Look for the public sector to offset the private sector weakness but the help will prove temporary and may very well extend the housing construction slump as we do not need more units at this time -- foreclosures will add heavily to supply over the next year. Not all of the public-sector expenditures are on buildings, highways are included in the figure, but they are less than 10% of the total.
Around the World
In a surprise move the Reserve Bank of Australia decided to hold their benchmark interest rate (known as the cash rate) steady at 3.75% -- all economists surveyed by Bloomberg had expected the central bank to raise for a fourth time in four months.
Australian policymakers stated they wanted to wait and see how the economic expansion plays out a bit before raising again – likely a very good decision. Also China is playing a role here as they’ve signaled some further tightening will ensue. The Australian economy has benefited mightily from China’s construction boom and increased lending restrictions will surely tamp that activity a bit.
Have a great day!
Brent Vondera, Senior Analyst
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