U.S. stocks fell for a fourth-straight session on Thursday, but it could have been worse as the broad market bounced from what was a 2% decline about 90 minutes into the session.  It’s growing increasingly evident that the economy doesn’t have the strength to become self-sustaining and that reflective in latest direction of stock prices. 

Slower-than-expected manufacturing figures out of China and Europe put the hurt on sentiment pre-market trading.  We’ve talked about the European slowdown for some time but we’ve also touched on Chinese growth slowing as the government pulls back on their stimulus measures, which led to what surely looks like a housing and overall bubble in construction activity.  Chinese manufacturing slipped in June to move closer to that 50 expansion/contraction cut line -- and just when the OECD has raised their global economic growth forecast.  Predictions from the OECD and IMF continue to be very good contrarian indicator.

This preceded a day of U.S. data that was not positive either as initial jobless claims rose back to the 470K handle, when they need to be falling below 400K, and the latest housing market data is corroborating what mortgage apps has been showing for seven weeks -- home sales are in trouble now that the tax credit is behind us.  Manufacturing activity for June came in at a good level, but missed expectations.

Market Activity for July 1, 2010

EU Banking and the Currency Move

Regarding that European bank liquidity story we’ve been talking about, 78 banks borrowed $136.5 billion from the ECB at 1% for six days yesterday.  These banks are in trouble and it’s clear they have about zero ability to borrow from other banks.  The ECB has been forced to reintroduce unlimited refunding operations (allowing troubled banks to roll their debt) and buy bonds from the basket-case members of the euro-zone. 

The Euro/USD pair (number of dollars per euro) rallied hard from 1.22 to nearly 1.25, which is huge for a currency move.  I saw a Bloomberg article stated that the rally was due to the bad U.S. economic data we received yesterday, making U.S. dollar-denominated assets less attractive.  But Treasury securities were essentially flat and stocks rebounded from the day’s lows.  Besides, does anyone really believe there was a sudden rush to the euro with all we know about what’s going on in Europe?  Not plausible.  More likely it was due to banks covering euros as they had to pay back the $540 billion in 12-month ECB loans.  Those who used the loans as arbitrage likely bought U.S. stocks with the proceeds and thus had to sell dollars and buy euros.  I don’t know if this is what occurred, but it’s more likely than the conventional story.

Jobless Claims

The Labor Department reported that initial jobless claims rose 13,000 for the week ended June 19, sending the figure back above the 470K mark to 472,000.  The consensus estimate was for initials to decline to 455K.  The previous week’s reading was revised up by 2,000 to 459,000.  The four-week average for initial claims rose 3,250 to 466,500.

Continuing claims were mixed as the standard issue (the traditional 26 weeks of benefits) rose 43,000 to 4.616 million, while the EUC (those emergency extensions that brought benefits out to as long as 99 weeks) fell a huge 375,000.  One has to assume that this decline was due to the expiration of those extensions (although with the latest stock market weakness Congress is scrambling to extend those benefits yet again). It could be that these people have found jobs, but with the initial claims reading stuck at elevated levels, and thus net layoffs continuing, one has to surmise that the decline is due to expirations. 

ISM Manufacturing

The Institute for Supply Management reported that their gauge of manufacturing activity for June decelerated to 56.2 from 59.7 in May.  While this is a strong reading, it’s well off of expectations (calling for a reading of 59.0) and with the latest bout of market weakness a miss is that much more damaging to sentiment.

The internals of the report looked good, obviously many of the readings decelerated, as the overall index did, but they are coming off of robust levels.  The most significant weakness though was in the key areas of inventories and exports  -- areas that have driven manufacturing activity, but are likely to wane as we get into September. 

The customers’ inventories gauge rose six points to 38.0, which means that respondents don’t believe their customers’ stockpile levels are as low as they had over the preceding months.  Also, the export reading also fell six points to 56.0.  Neither of these numbers are bad on the surface, but they could be signaling weakness ahead, and they really are the last segments of the report you want to see deteriorating right now.

Pending Home Sales

The National Association of Realtors (NAR) showed what the mortgage apps figures have been ringing clear: Official existing homes sales will plunge, if not when the June numbers are reported then when July’s are released. 

Pending home sales slid 30% in May (these are signed contracts to buy a previously-owned home; these sales are officially counted when the contract closes so pending sales for May show up officially in June and July) after the 6% increase in April.  The hangover now that the tax-credit party has ended is going to be harsh.  The 30% slide is a record decline, double the previous record that occurred when it was believed the tax credit would be allowed to expired for the first time last fall.  This data only goes back to 2001, so when we talk about records there’s not a lot of data here, but I wanted to offer a sense of the magnitude. 

By region, pending sales fell more than 30% in the Northeast, Midwest and South.  The West reported that pending sales fell 20.9%.

Have a great 4^th of July!