Daily Insight

U.S. stocks took a pretty good beating along with commodity prices as an ugly jobless claims report fostered concerns that even mild job growth will be delayed and hence that feeds into concern about final demand.

Financials, energy and basic material shares led the declines. People who have been late to the inflation trade, rushing in after commodity-related stocks were already up 85% from the March lows, have to be a bit annoyed to say the least. We cautioned against myopically moving into this trade after these runs – you had to begin a position 10 months back when few were thinking about it. Now these stocks are getting hammered. I think commodity-related stocks are a place to be over the next two years, but renewed economic issues are inciting a pullback – you’ve got to pick your spots in this market.

A renewed concern about sovereign debt default risks, which appeared to have been allayed for a couple of days, also worked as a cudgel on the riskier assets (stocks, commodities, high-yield corporates).

Better-than-expected factory orders (December) and same-store sales results (January) were not enough to offset the aforementioned issues. Same-store sales looked quite good, expanding on solid figures for December, after fifteen months of getting absolutely crushed. Apparel-store sales were up 6.4% from the year-ago period; luxury was up 10.9%; discount rose 2.9%; and wholesale clubs up 2.1%.

But the jobless claims figures and government debt problems took center stage.

On claims, the initial claims number moved farther away from the 400K level as it is back to 480K. The 400K number is key because it almost always accompanied by some level of job growth.

On the government debt issues, the problems are spreading and when it was just Greece the market could see a European Union bailout as not a huge deal. But the Europeans also have problems in Spain, which raised its budget deficit forecasts through 2012, and Portugal, which endured a failed bond auction yesterday (which means bids fell short of what they were offering). The European banks hold a lot of government debt and if these securities continue to erode then they’ve got another capital adequacy problem on their hands.

The European Central Bank (ECB) left its benchmark interest rate at 1%, a record low, and has indicated they’ll hold off from beginning to gently raise rates until they get more information on the economy and inflation – early indications for first-quarter growth in Europe is looking weak. The government debt problems are surely also a topic of conversation within the ECB.

The Bank of England left their rate unchanged at 0.50%, also a record low. The BofE did vote against extending its quantitative easing program (the bond purchases). Economists had expected them to pause. And that’s a key word: pause. I think we could find that the halt of QE is more temporary than permanent.

Market Activity for February 4, 2010
Jobless Claims

The Labor Department reported that initial jobless claims rose 8,000 to 480,000 in the week ended January 30 – economists were expecting a move down to 455,000. Initial claims remain sticky and that’s a concern. It was just a month ago in which it appeared the figure was headed to the 400K level – a level that is needed to offer a good confidence that monthly job growth is upon us. (I’ve been expecting some mild gains in payrolls to begin over the next couple of months, but this claims data is eroding the conviction of this call.)

The four-week average of initial claims rose 11,750 to 468,750.

Continuing claims also continue to rise. The standard claims (those traditional level of benefits that last 26 weeks) rose 2,000 to 4.602 million. The Emergency Unemployment Compensation (EUC) claims jumped 242,000 to 5.632 million – these are the claims that extend out to as long as additional 73 weeks. EUC claims have jumped 600K over the past three weeks.

So the jobless claims data have taken a turn for the worse. Prior to this deterioration that’s occurred over the past three weeks at least we had initials improving even if continuing claims kept moving higher. Now with both on the rise it does suggest that firms will hold off a bit longer before they begin to even mildly increase payrolls.

I will be very interested to see the long-term unemployment data in the employment release this morning. That number hit a new record of 29.1 weeks on average via the December jobs report. I was thinking that figure to begin a slow decline in tomorrow’s report; that’s looking increasingly unlikely.

Factory Orders

Factory orders rose 1.0% in December, following the same increase for November – the December increase was twice what was expected. This data includes both durable and non-durable manufacturing orders.

The orders for durable goods was up 1.0%, which is a significant improvement from the durable goods orders we received last week – that report showed orders rose just 0.3%. Orders for non-durable goods (those meant to last less than three years) also rose 1.0%.

Orders for non-defense capital goods ex-aircraft rose 2.2%, which followed a strong 3.2% increase in November. This figure is the proxy for business spending and we’ve seen a nice bounce over the past two readings.

As we talked about yesterday, what you watch for is this trend to extend through the first quarter. Firms spend unused annual budgets at year end, and this was very true last year as firms were especially chary with their cash for most of 2009. The likelihood that firms are going to go on a spending binge must be confirmed by a continuation of the trend. If it is, it will be very helpful for growth over the next few quarters as the economy will need all the boost it can get from the business side of things as high household debt levels and 10-17% unemployment/underemployment will dampen personal consumption.

Productivity

U.S. worker productivity rose at a 6.2% annual rate in the fourth-quarter, as estimated by the Labor Department’s initial look at the figure. This is a jobs-slashing productivity environment as output rose 7.2% (as firms do a little inventory rebuilding after cutting stockpiles at a record pace during the first half of 2009) and employees’ hours rose just 1.0%.

This is a great number that shows firms are going to be able to absorb higher input costs. Firms will enjoy very high margins and increasing profits for a spell. However, productivity improvements that are purely led by job slashing means trouble for end demand (where is incremental consumer demand going to come from in this environment?) and top line growth for businesses. Thus a durable profit growth story remains very much in question.

Everyone wants higher productivity levels, but the test is to get it when payrolls are on the rise. It’s a short-lived event when it occurs simply because of labor-market erosion.


Have a great weekend!


Brent Vondera, Senior Analyst