U.S. stocks bounced between gain and loss on several occasions Monday, failing to ultimately hold onto an afternoon session rally as energy and basic materials shares sent the broad market lower in the final hour. 

Dovish comments from the ultimate monetary dove Janet Yellen – President of the San Francisco Fed Bank – helped bank stocks as she stated the Fed will need to keep rates very low as the economy will operate below potential for the next two years. Yellen is not a current member of the rate-setting FOMC.

Financial and industrial shares were the only gainers among the 10 major sectors.  As mentioned above, energy and basic material shares led the decline, along with utilities. 

Oil prices advanced past the $80/barrel handle again, just two weeks back it looked as though crude was going below $70.  The index that tracks energy stocks didn’t follow this move in crude though as shares of Schlumberger (which makes up roughly 6% of the index) weighed on the measure.  The oil-services giant announced it would purchase Smith International in an all stock deal. Schlumberger shareholders didn’t like the premium the company decided to pay for Smith, so sent the stock lower as a result. 

Volume was lackluster yet again as just 905 million shares traded on the NYSE Composite.  That’s 21% below even the weak average volume of the past six months and 35% below what was considered the norm a couple of years back.

Market Activity for February 22, 2010

Dallas Fed Survey

The Dallas Fed reported that factory activity within the 11^th Federal Reserve district slipped to contraction mode in February.  The measure posted a reading of -0.1 after hitting 8.3 in January, ending a three-month streak of expansion. 

Most of the sub-indices of the report showed deterioration, led by the new orders component that got slammed, falling to -6 in February from 27 in the previous month – the share of respondents reporting decreased orders more than tripled from January; capacity utilization was unchanged from January as it came in at zero; employment remained negative, falling to -5.2 from -4.5; unfilled orders returned to negative territory after posting a positive result in January for the first time since the recession began, falling to

-2.4 from +2.3; inventories remained negative, virtually unchanged at -9.9 for February vs. -10.0 in January – and the measure of inventories six months from now registered

-10.0, I believe this is the only manufacturing survey in which there is no expectation of inventory rebuilding taking place. 

There were a couple of sub-indices that did accelerate.  The delivery times measure rose to 3.3 from -2.2 – that’s a good sign, a measure we keep close eye on within each of the factory surveys; a higher reading means delivery times are slowing and if the trend holds it suggests that factories are having a tough time keeping up with orders.  (This improvement should be accompanied by a rise in unfilled orders though to provide concrete evidence hiring will be needed to keep up with orders.)

Unfortunately, the prices paid measure exhibited the greatest spike, jumping to 40.9 from 32.6; the prices received measure fell back to negative territory – that’s not going to be good for profit margins. 

Week’s Data

We didn’t have much data out yesterday, that Dallas Fed survey is not a major factory gauge (I only touched on the results because it was the sole data release), but things heat up today. 

This morning we get the S&P CaseShiller Home Price Index (December), the Richmond Fed Index (February) and consumer confidence (February). 

CaseShiller has posted six months of mild increase, I think that streak is going to run into trouble over the next few months but should post another gain for December.  The Richmond Fed showed factory activity slipped into contraction mode in January so we’ll see if it bounces back.  The consumer confidence survey has improved for three-straight months but remains at past recession levels.

On Wednesday we’ll get mortgage apps (for last week) and new home sales (January).  We’re coming off of two weeks of decline on the apps readings and two months of decline on new homes sales – the recent spate of declines in new home sales has sent the annualized reading back to a level that’s just 4% above the all-time low hit in January 2009; that figure had risen to 27% above that low mark as of July. 

On Thursday, we get the usual event that is weekly jobless claims.  We need to see initial claims make progress back below the 450K mark to offer some reasonable hope the figure will make it down to 400K over the next 4-6 weeks. (A level of 400K on initial jobless claims is always accompanied by at least some monthly job growth, so that’s the level to watch right now.) 

On Friday we get the first revision to fourth-quarter GDP, the Chicago Purchasing Managers index (factory activity from that region, and it’s for February) and existing home sales (January).   The GDP figure is not expected to be revised from the 5.7% it printed via the initial estimate.  Chicago came in hot during January so we’ll see if we can hold onto that level of growth for February.  Existing home sales plunged 16.7% in December; we’ll need to see some bounce, but it’s likely to be weak. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900