U.S. stocks gained ground yesterday, recouping Tuesday’s losses, after better-than-expected reports on employment and service-sector activity . 

Also helping the advance may have been increasing signs that BP’s “static kill” is holding as the company waits for completion of the relief well that’s expected to ultimately seal the leak.  It’s important to recall that the roughly year-long rally that pushed the S&P 500 to a 19-month high ended on April 23, just a day after the Deepwater Horizon drilling rig sank, so the improving prospects of a successful cap has likely played a role in the latest four-week rally.

Stock-index futures were pointing lower in pre-market trading yesterday, but turned around after a preliminary jobs report suggested that we’ll see more private-sector payrolls were added in July than previously thought – we get the official jobs report tomorrow.  The best economic data we’ve receive in several weeks by way of the ISM service-sector report for July helped the market hold momentum into the close.

Consumer discretionary shares led the advance, followed by health care and basic materials.  Telecom was the only group of the 10 major industries to close lower on the session. 

Market Activity for August 4, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose 1.3% for the week ended July 30, following the previous week’s 4.4% decline.  Both refinancing activity and purchases delivered the higher reading, but both were weak as refis rose just 1.3% and purchases were up 1.5%.  The average contract rate on the 30-year fixed mortgage fell back to 4.60% last week, just a basis point above the all-time low.

For purchases, which is really what counts here as we need sales to absorb current and coming supply, they’ve risen for three straight weeks.  These apps plunged 42% over the first 10 weeks that followed the tax credit expiry on April 30. Since then apps to purchase a home have increased 7.1%, which signals we’ll see some mild increase in existing home sales maybe by August, but most likely by the September report. 

We get the existing home sales report for July on August 24, which is going to post the third-straight month of decline. 

ADP Employment Change

The preliminary jobs report from payroll outsourcing firm Automatic Data Processing showed that the private sector added 42,000 jobs in July, beating the consensus estimate of a 30K pick up and is double ADP’s reading for June.  This survey only covers the private sector and while its figures have been shy of what the official government reports have released, it has done a good job of predicting the direction and magnitude of the change.

The ADP report measured that the goods-producing sectors continued to shed positions in July, down another 21,000 as construction cut 14K and manufacturing cut 6K – it will be interesting to see what the Labor Department says occurred on Friday as the ISM readings have suggested manufacturing employment jumped in July. 

The service-providing sectors added 63,000 positions, the sixth-straight month of increase.

In terms of firm size, large firms (>500 employees) didn’t add to payrolls in July (according to ADP), medium firms (>50 employees) added 21,000 and smalls also added 21,000.

As for tomorrow’s official jobs report, the expectation is for a decline of 63,000 payrolls, pushed lower by those Census workers whose work has now ended.  The private sector is expected to have added 90,000 positions in July.

ISM Service-Sector

The Institute for Supply Management’s survey of service-sector activity accelerated in July, rising to a reading of 54.3 (expected to decelerate to 53.0) from 53.8 for June.  A reading above 50 suggests the sector expanded, so this latest reading marks the seventh-month of expansion.

The factors that moved the overall index higher were: the new orders reading, which  rose to 56.7 from 54.4; export orders rose to 52.0 from 48.0; the employment gauge returned to expansion territory, coming in at 50.9 from 49.7 (the highest reading since the recession began in December 2007, but as the chairman of the survey noted, the reading must remain above 50 for at least a full quarter before we can be confident service-sector employment growth is sustainable).  

Backlog of orders, supplier deliveries and inventories all decelerated, but did remain in expansion mode – thus they are growing but at a slower rate. 

Thirteen industries reported growth, which is down from 15 in June but the number of industries reporting increased employment increased to nine from eight in June and the number reporting a decrease fell to four from seven. 

The most troubling aspect of the report was the inventory sentiment figure.  While it was unchanged at 59.0 in July (a reading above 50 is worse with this gauge as it shows respondents believe their inventories are too high) -- 27% vs. 25% in June believe their stockpiles are too high, 9% vs. 7% believe they are too low and 64% vs. 68% believe they are just right.  Continued deterioration within this segment will cut short the inventory cycle, which already appears to have peaked. 

Nevertheless, I’m going to say this is the most encouraging report we’ve received in several weeks. 

Have a great day!

Brent Vondera, Senior Analyst