The headwinds of European debt concerns and the evaporation of Chinese stimulus continues to assault the markets, although the major indices held in there pretty well considering the drag the Eurozone is going to put on global growth.  The run, well maybe a jog for now, for safety persists as Treasury securities recorded a second-straight session of meaningful gain.

The dollar rallied as the euro got slammed again -- pretty much shaping up as our commentary suggested would be the case via the March 24 letter entitled Can the Dollar Rally Continue? (archived on the website) – as even ECB council member Axel Weber acknowledged that Greece’s fiscal crisis is threatening “grave contagion effects.”  He’s got it partially right at least, it’s just not the Greek budget but the entire entitlement-centric system is crumbling, and another EU banking crisis is not out of the question. To repeat, so-called rescue packages can ease the concern on a day-to-day, even week-to-week basis, but eventually the Eurozone will have to ultimately face reality; their system is not sustainable. 

Eight of the 10 major S&P 500 industry groups decline for the session, led by energy, industrials and consumer discretionary shares.  The traditional areas of safety out-performed the market for a second day – health-care and consumer staples were the only groups in the black.  Naturally, with this weakness, volume has begun to pick up, hitting levels that we haven’t seen with this consistency since early in 2009. 

Market Activity for May 5, 2010

Overseas Bourses

In overnight trading, the Asian markets got wacked as the Nikkei (Japan) was down 3.27%, the Shanghai Composite slid 4.1% and the All Ordinaries (Australia, which is on the periphery of that region and very dependent on Chinese stimulus) lost 2.2%.  The Chinese equity market is now down 18% from its late-2009 intermediate-term peak and off by 13.5% over the last three weeks; this is important because the Shanghai Composite has led other major global indices over the past 18 months.

Oil Slick

Based on all of the concerns surrounding the EU situation and the drag on overall global growth (the Eurozone hasn’t been able to foster much growth but it does account for 25% of world GDP) the price of oil is on the slide.  Also putting pressure on price was a bearish energy report yesterday that showed a higher-than-expected build in supplies.  Crude/barrel, which hit $86.15 on Friday, has moved into the $70 handle to $79.88/barrel. Wholesale gasoline is down 8.5% since Monday, which will delay the move to $3 at the pump. 

Mortgage Applications

The Mortgage Bankers Association reported that their applications index rose 4.0% in the week ended April 30 after the 2.9% decline in the prior week.  Refinancing activity declined for a second straight week as the average rate on the 30-year mortgage remained above 5.00% -- although it did ease slightly, down to 5.02% from 5.08%.  Purchases jumped 13.0%, marking the third-straight week of increase – up 24% over the past month.

So, here it is as this data covers the week in which the home-borrowers tax credit expired.  The rush to get in before this expiration is evident and as we touched on yesterday this will show up in next month’s pending home sales data (which will be for April) and official existing-home sales for May and June.  From here on out, the housing market will have one less crutch of support with which to depend upon. 

ADP Employment Change

The employment survey from Automatic Data Processing Inc. (a major payroll processing firm) showed that employers remained hesitant to hire in April as they estimate that private-sector payrolls rose just 32,000 in April – this is purely a private-sector look so it doesn’t account for the 70-100K in census hiring that will show up in Friday’s official numbers.  Due to recent revisions, this survey now shows three months of job growth, but it’s weak with +3K in February, +19K in March and this +32K for April.

Over the past few months this ADP report has been low-balling the actual results – that is, the official government numbers have been better than what ADP has been suggesting since November.  I do kind of feel that the private-sector results will show something better than what ADP is saying but one shouldn’t expect anything special.  (Special would be a reading of 300-350K on Friday, with 200K of this number coming from private-sector hiring – these are the readings we’ll need for 12 months to get the unemployment rate down to the 8% handle – the 40-year average is 6.2 %.) 

ADP estimated that service-providing industries added 50,000 positions, while the goods-producing industries shed 18,000 positions.  The encouraging sign is that the manufacturing sector increased payrolls by 29,000 – third month of increase.  However, construction continues to weigh as this sector cut payrolls by 49,000 -- this marks the 39^th straight month of decline for the sector and brings the erosion in construction-related jobs to 2.159 million from the 2007 peak.

According to ADP, large employers (those with more than 500 workers) added 14,000 jobs; medium-sized businesses (< 499 workers) added 17,000; and small firms (< 50 workers) added just 1,000.  So the most powerful engine of job growth over the past three decades (small business) remains reluctant to add to payrolls.

ISM Service-Sector

The Institute for Supply Management reported that their service-sector index held at 55.4 in April, matching the previous month’s reading – the consensus estimate was for the index to accelerate to 56.0.  A reading above 50 means that more respondents reported growth in their business than those that reported contraction.

New orders slipped to 58.2 from 62.3, but still a strong reading; backlog of orders fell to 49.5 from 55.5; supplier deliveries rose to 53.5 from 49.5 (so these two sub-indices, backlog and deliveries, we’ve been talking about for a few months posted conflicting results); the employment index ticked just a bit lower, down to 49.5 from 49.8 (28^th straight month of contraction); inventory change rocketed up to 54.5 from 46.5 – while firms remain cautious, some of this caution appears to have eased as suggested by this move.

What respondents are saying:

* “Best production/services levels in 24 months.”  (Wholesale Trade)

* “Selling prices for our products continue to decline.”  (Mining)

* “The market and other financial indicators point to an improving economy; however, that is being overshadowed

   by skepticism and lack of confidence…in a post-stimulus era.”  (Educational Services)

* “Markets show slight signs of tightening.” (Information)

* “Business conditions are improving.”  (Management & Support Services)

* “There are signs of improvement which are leading us to be optimistic; however, as prices escalate the stability

   of the recovery is at risk.”  (Retail Trade)

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com