U.S. stocks rebounded yesterday morning as traders returned to dabble in some riskier assets after a 24-hour respite.  The DJ Industrial Average got within 44 point of 11000 and the S&P 500 looked ready to gear up to tackle the pre-Lehman collapse level of 1250 as it moved past the 1175 mark at one point.  But the rally was rejected after lunch and the major indices went into freefall in the final hour of trading to completely erase the earlier gains.

Fed Chairman Bernanke, during Congressional testimony officially intended to explain the eventual exit strategy, made it abundantly clear that this discussion in no way signals the Fed is ready to pull back on their extraordinary level  of accommodation.  In fact, he explicitly stated that the economy continues to require the support of a record low fed funds rate.  These statements follow comments from other Fed officials on Monday that also suggested the Fed will remain on hold.  Monetary tightening is a ways away and that’s ecstasy to stock traders.  

However, that morning rally evaporated as people apparently read Bernanke’s text and noticed a little comment touching on actual sales of mortgage-backed securities when the Fed does begin to withdraw stimulus.  What? Actual MBS sales, instead of just letting them pay down?  Now, such action would really be a ways down the road, as  doing so anytime in the near future would obliterate the housing market – and Bernanke was there to talk about an exit strategy so it shouldn’t be surprising that he brought this topic up.  But just as traders find ecstatic delight in ZIRP, they view even the mention of asset sales by the central bank as anathema and this was probably behind the late-session pullback. 

The third ugly Treasury auction in a row, this one being the issuance of $32 billion in seven-year notes, may have also played a role in the market’s reversal.

Market Activity for March 25, 2010

Latest on the EU Sovereign Debt Woes

Concerns over European sovereign debt issues waned yesterday after the ECB (European Central Bank) President Trichet offered support to Greece by extending the central bank’s program to accept BBB- or higher-rated collateral for short term loans out to 2012; that program was set to expire beginning 2011.  By year-end 2011 the collateral requirement reverts to the previous cutoff of A-.  What this does is offer a major crutch to Greece over the next year (its government debt is at risk of falling to BBB-) as it provides a huge reassurance to holders of Greek debt. 

And in the latest latest, EU members issued a somewhat vague commitment (nothing new there) to rescue Greece if that government runs into a brick wall of having to pay much higher interest rates in order to roll its debt.  The plan, states that the IMF (that’s the International Monetary Fund, a relic of the 1944 Bretton Woods agreements) would fund a third of the rescue with EU members funding the other two-thirds via bilateral loans.  However, when the time comes, and the Europeans are certainly hoping that these comments avert a problem, all EU members would have to agree on the plan via a vote.  Germany remains reluctant to extend help, they would be on the hook for most of the rescue as they’re the strongest economy, but there’s little doubt in my mind that they’ll end up bailing Greece out when the time comes.  And they all know that the situation remains precarious as Spain, Italy and Portugal are very likely to run into sovereign debt issues at some point down the road.  Ireland was included in this group, but that government is in the process of implementing very austere budget cuts.  They’re the only one doing so for now. 

Jobless Claims

The Labor Department reported that initial jobless claims fell 14,000 to 442,000 in the week ended March 20 (8K lower than expected) – this marks the first move below the 450K level since early February and is the third time we’ve seen sub-450K since late December (let’s hope we don’t see the third rise toward the 500K level). 

The four-week average, which smoothes the data as weekly moves can be volatile, fell 11,000 to 453,750.

Continuing claims also declined.   The standard issue of continuing benefit claims fell 54,000 to 4.648 million and EUC claims and its various extensions fell 346,000, nearly erasing the prior week’s surge of 352,000.  EUC stands for Emergency Unemployment Compensation and it takes over to provide another 18 months of benefits when the standard 26 weeks of benefits run out – have you learned French yet?  Combine the standard and EUC claims and we have 10 million people on jobless benefits, which shows the extent of the long-term unemployed picture. 

So, we need initial claims to consistently decline and fall below the 400K level – a level that is always accompanied by job growth, even if it may be mild.  I would expect a nice rise in payrolls when the March jobs data is released on April 2.  Certainly we’ll see a bounce as the weather in February had some effect on that month’s reading. 

We’ll keep a close eye on how much of the increase will be due to 2010 census hirings, which some estimate to account for 75K-100K of the monthly readings over the next few months.  A six digit job growth figure for the month will make headline news (it’s been 28 months since we’ve seen a positive reading of this magnitude; we’ve seen only one positive months of job growth over the last 26 months). 

Back in October was when we first predicted that monthly job growth will occur by February or March and it looks like we’ll see that come to fruition.  However, the census hiring is only a short-term gig and those people are going to be out looking for work again by year end. 

We’ll need 100K-plus per month job growth just to keep the unemployment rate steady and 300K per month to bring it meaningfully lower over the next year. There are over five million discouraged workers (meaning they haven’t been looking for work because they don’t feel the opportunity is there) and, from what I read, three million new graduates coming in May; big job growth will be needed to absorb these re-entrants in order to push the jobless rate lower. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900