U.S. stocks gained ground for a second-straight session as better-than-expected economic data juiced investor sentiment.  However, while the broad market held just about all of its early-session gains, the Dow retreated a bit from the session high and the 11K mark remained elusive for at least another day.

Energy shares led the broad-market’s advance as the price of crude jumped well into the $86/barrel handle – here we go again.  Basic material stocks were the next-best performing group as the commodity play rolled.  Consumer discretionary shares rounded out the top performers – this one really has me confounded; how can the market completely ignore the headwinds higher energy prices have on an already burdened consumer. 

We’ll see how stocks react to possibly rising interest rates, at least over the near term.  Treasury yields advanced yesterday, moving closer to that 4.00% level on the 10-year – a closely watched level.  I’m not sure a continued sell off on the long-end of the curve (prices go down yields go up) will act as a wall, halting the run in stocks, but with roughly $80 billion in government debt issuance this week things may just get interesting on the interest-rate front. 

Market Activity for April 5, 2010

We’ll have this drumbeat of debt issuance for a long time.  This week $80 billion, for the year $2 trillion and if we don’t get to inspiring aggressive job growth the Treasury will be issuing $1.5-$2 trillion in debt for the next few years as tax revenues will be woefully insufficient to the spending plans.  The week’s round of auctions did get off to a good start though as $8 billion in TIPS were well received – well, that’s an understatement as the bid-to-cover (measure of demand) came in at a record 3.43.  Inflation isn’t an issue right now, but as the Fed myopically focuses on the wage-push variety the market is correctly watching the commodity-price version of inflation. 

Crude Reality

The price of crude oil for April delivery closed up 2.06% to $86.62/barrel yesterday.  The price of wholesale gasoline advanced to $2.35/gallon.  As we touched on a couple of times last week, wholesale gasoline at this level means a $3 pump price is around the corner – assuming some market scare doesn’t occur that causes a summary retreat in energy prices.  At a 9.7% official unemployment rate and 16.8% underemployment, $3 gasoline will be much tougher to deal with than the last time we were here when the jobless rate stood at 6% and the underemployment rate at 11%.  Adding another headwind to the consumer will likely hit their confidence, which already remains stuck at past recessionary levels.

ISM Non-Manufacturing

The Institute for Supply Management’s survey of the service sector accelerated in March to remain in expansion mode for the third-straight month.  The reading rose to 55.4 (easily beating the 54.0 estimate) from 53.0 in February – this is the highest reading since May 2006.  A reading above 50 marks expansion.

The internals of the report were mainly positive.  The new orders index surged to 62.3 form 55.0; backlog of orders jumped back to expansion mode, rising to 55.5 from 46.0; the inventory gauge ticked up to 46.5 from 45.0, while this reading remains in contraction mode it continues to make progress; export orders rallied to 57.5 from 47.0; employment gained 1.2 points to 49.8 from 48.6 – on the verge of expansion.

The unfortunate aspects of the report were the decline in supplier deliveries, inventory sentiment and another rise in prices paid. 

Supplier deliveries fell to 49.5 from 53.5 – you want to see this number trend in expansion mode for several months so to show that vendors are having trouble keeping up with orders.  The inventory sentiment gauge, which tracks whether respondents believe their level of stockpile are too low or too high, fell to 52.5 from 60.0 – a lower reading means that their inventory levels are too high, which is telling considering stockpiles remain so low.  The prices paid measure rose to 62.9 from 60.4.  This reading’s getting up there and will cut into profit margins as the service sector may find it difficult to raise prices with the jobless rate at such heights.

Pending Home Sales – Get Your Tax Credits!

The National Association of Realtors (NAR) reported that pending home sales (contract signings for existing-home purchases) jumped 8.2% in February – economists had expected the reading to come in unchanged from the previous month – after falling 7.8% in January.  Three of the four regions registered gains, the West being the odd man out with a 4.8% decline.   

Existing home sales are officially counted when the contract is closed, which generally occurs 4-6 weeks following the signing, so this reading is a great indication of what will occur in March, April and into May.  This is now the second indication, the first being last week’s mortgage applications release, that we’ll see another surge in home sales as buyer scramble to get in before the tax credit expires – a contract must be signed by April 30 or closed by June 30, but the signing deadline in the important date as buyers won’t want to take a gamble that the contract will close on time if they sign in May.

So we’ll see previously-owned home sales pick up in March and rally in April.  May is kind of up in the air, but I suspect the final week or two of April contract signings should give that month a lift too.  From there let’s hope what the chart below illustrates doesn’t occur again, although I suspect it will as the labor market needs much improvement and home sales are even more elastic to the rate environment than is typically the case.  In any event, after three months of decline, with December and January’s percentage declines being the largest on record, we’ll welcome the bounce.

Have a great day!