U.S. stock indices ended mixed on Wednesday as some legislative concerns and a cautious economic report from the Fed offset better-than-expected results from the service sector.  The major indices ended the session essentially flat with the Dow Industrials and NASDAQ Composite slipping, while the broad S&P 500 ended fractionally higher. 

Things were going pretty well as somewhat upbeat sentiment in pre-market futures trading flowed into the official session.  However, the gains evaporated shortly after lunch, right around the time of President Obama’s press conference urging lawmakers to vote on health-care overhaul (which means they’ll choose reconciliation – so the hurdle is just 51 votes in the Senate) and the Fed released its latest Beige Book – that report expressed concerns over the real estate market and wasn’t particularly cheery on the labor market either.   

Basic material shares were the best-performing sector for a third-straight session.  Health-care was the laggard, leading the three of the 10 major sectors that fell on the session.

Market Activity for March 3, 2010

Crude Rollin’ Again

Crude oil for April delivery moved well into the $80 handle (crude looked ready to crash below $70 just three weeks back) after the latest weekly energy report showed refinery operating rates rose to the highest level since October. 

Refinery run rates hit 81.9% last week, which is still very low but operations had been rock bottom over the past few months, and this offset a huge build in supplies.  Oil supplies jumped 4.03 million, or three times more than expected, but if run rates continue to rise then the oversupply will be consumed and that’s what pushed prices higher.  The U.S. dollar was down yesterday, and that also supported the price of oil. 

Demand improved, up 3% in the latest week relative to the year-ago period.  However, we must remember what was occurring a year ago (stocks slid to a 13-year low, the labor market was shedding 750,000 jobs per month, consumer confidence plunging, etc.).  So, up 3% from that level of activity isn’t altogether encouraging.  The average during more normal activity is 21 million barrels per week and the average of the past four weeks is 19.3 million, or 8% below normal. 

The price of wholesale gasoline rose 2.3% yesterday to $2.25/gallon, an 18% jump from a month ago.  This amounts to a retail price of roughly $2.80/gallon if the wholesale price holds here, and a move to $3 is going to cause some issues for this economy. 

Mortgage Applications

The Mortgage Bankers Association reported its applications index rose for the first time in four weeks, jumping 14.6%.  The index fell 8.5% in the previous week and 2.1% and 1.2%, respectively, in the two weeks before that.

The purchases side of the index rose 9.0% after three weeks of decline, a slide that pushed the MBA’s purchases index to a new 13-year low. 

Refinancing activity rose 17.2%, incentivized by another dip below the 5% level – the rate on the 30-year fixed mortgage fell to 4.95% from 5.04% in the week prior. 

As the WSJ reported yesterday, nearly 40% of all borrowers with 30-year conforming fixed-rate mortgages (collectively $1.2 trillion in home loans) still have mortgage rates of 6% or higher.   So those who can refi, were incentived to do so in the latest week.  But between stricter lending standards and a lack of equity in the home, many can’t qualify for refinancing.

Preliminary Employment Reports

As has become customary on the Wednesday before the official monthly jobs report (first Friday of the month), we received preliminary looks at the employment situation from outsourcing firm ADP and outplacement firm Challenger, Gray and Christmas. 

The report from Automatic Data Processing, Inc. (a provider of business outsourcing solutions that processes payrolls for one in six private-sector workers) reported that private-sector payrolls fell 20,000 last month, following a 60,000 loss in January that was downwardly revised from the initially reported loss of 22,000.  The decline for February is the lowest since the economy began shedding jobs in Jan. 2008.

The report estimated that goods-producing industries shed 37,000 workers, but service-providers added 17,000 jobs.  Goods-producing industries -- such as manufacturing and construction -- make up about 17% of all private-sector payrolls.  The service-providing sectors -- such as real estate, engineering, finance, retail, law, business services, education and leisure – make up the remaining 83%.

ADP reported that small firms (< 50 employees) shed 18,000 positions; medium-sized firms (< 500 employees) added 8,000 jobs; and large firms cut 10,000 jobs.

This report will likely diverge significantly from the official Labor Department reading to be released tomorrow.  The BLS (Bureau of Labor Statistics) – the data compiling arm of the Labor Department -- counts a job loss when someone doesn’t report to work, say for weather-related reasons.  As a result, we are likely to see a big decline in construction payrolls during for February.  Conversely, the ADP report more appropriately doesn’t count a job is lost until the employee is removed from payroll.  

So this ADP reading probably offers a much truer reading for last month’s employment situation.  The official data may be significantly distorted as result of the snowstorms.

In a separate report, the Challenger data showed that planned layoffs for February came in at 42,090 jobs – that’s down 77.4% from the year-ago period.  Their report on hiring showed firms announced 8,300 new hires for the month.

ISM Service-Sector

The Institute for Supply Management’s Non-Manufacturing Index rose to 53.0 in February (51.0 was expected) after hitting 50.5 for January.  A reading above 50 marks expansion and this latest number puts the index solidly past 50 for the first time since May 2008 – the reading hit the 50 handle three times over the previous six months but failed to actually move beyond the 50 handle posting readings of 50.1 in September and October and then 50.5 in January.

The new orders index accelerated in February for a sixth-straight month, hitting 55.0 from 54.7 in January.  The employment reading for the service sector contracted for the 26^th straight month but continued to improve, rising to 48.6 from 44.6.  Backlog of orders and supplier deliveries (two areas we’ve been keeping close eye on) both improved, but order backlog remained in contraction mode while supplier deliveries remained in expansion for the third-straight month. 

The inventory reading continued to show that firms are not exactly rushing to rebuild stockpiles even as those stockpiles remain near record low levels.  The  inventory gauge remained in contraction mode for a second-straight month, falling to 45.0 from 46.5 in January (it temporarily moved above 50 for one month, December, which was the first expansionary print since August 2008).  The ISM reported that 26% of respondents feel their inventory levels are too high, 6% feel they’re too low, and 68% feel they are just right – those numbers are a bit lower than the previous month.

Overall, this is a good report and shows the service sector has begun to participate in the expansion, prior to this reading the ISM data had illustrated that most activity was segregated to the manufacturing sector. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900