U.S. stocks began the session lower and things got worse as the day wore on, accelerating to the downside in the final hour, after the latest look at personal incomes came in below expectations and the July manufacturing report from the Dallas Fed region posted its second-month of decline – I’m sure the deep-sea drilling ban is probably making that regional factory survey appear worse than it otherwise would be.  The continuation of weak data over the past couple of months is causing analysts to question their earnings expectations. 

Financials, consumer discretionary and industrials led the broad market lower.  Consumer staples, health care and tech were the outperformers.  All 10 of the main industry groups did close down for the day.

Beyond yesterday’s data releases, traders probably had the July jobs report on their minds (we’ll get that number on Friday) and were hesitant to get in front of that one; there’s a good chance we may see a decline in private-sector payrolls.  Everyone knows the total number will post a third month of decline due to the elimination of those census jobs.  For now, the consensus estimate is for an increase of 45,000 private-sector jobs, but remember we saw initial jobless claims hit 500K for the week ended August 13, which is the report that corresponds with the July jobs survey period.  

Market Activity for August 30, 2010

Personal Income & Spending

The Commerce Department reported that personal income rose 0.2% in July (0.3% was expected), following a flat (0%) reading for June.  Personal spending rose 0.4% (0.3% was expected) after June’s 0%. 

On the income side, total compensation rose 0.3% in July after June’s -0.1%, same is so for the wage & salary component (total compensation is up 2.0% y/o/y, W & S is up 1.7% y/o/y); proprietors (small business) income gained 0.2% after the -0.5% in June thanks to a 15.5% increase in farm income – nonfarm fell again, down 0.4%; rental income jumped 0.9% after June’s 0.6% increase; personal income from assets fell 0.2% as interest income fell 0.4% and dividend income rose 0.2%; government transfer payments rose 0.3%, matching June’s gain.

Personal income excluding government transfer payments slipped slightly in July after rising for six-straight months. 

On spending, expenditures on durables (items meant to last at least three years) ended a three-month slide to rise 1.21% -- the segment was likely fueled by auto sales and dealer incentives; I doubt appliances rebounded, not with the record slide in home sales for the month.  Non-durables fell 0.3% after advancing 0.2% in June.

As a result of spending outpacing income, the cash savings rates slipped to 5.9% in July from 6.2% in June.

BOJ Falls Flat and Currency Fluctuations in General

The Bank of Japan (BOJ) boosted its $230 billion liquidity injection program (basically six month interest-free loans to banks) by $118 billion in an attempt to thwart the rising yen; the $/Yen pair has hit a 15-year high.  And the Japanese currency continues to rally even after this announcement as the market signals too little too late to the BOJ.

It has been very strange to watch stocks hold up even as the yen soars.  Sure, the market has declined of late as the Dow has dropped back to 10K from 10,700 in early August, but with the $/Yen in the 84 handle that matches with an S&P 500 that’s much lower. 

The reason is the yen is the carry trade, borrow it to buy risky assets.  When it rises, it shows traders have been de-risking.  But maybe, just as so many other indicators that usually prove quite predictive are not so today as the government has distorted market activity, the $/Yen indicator of stock prices has completely broken down.  Maybe the only currency pair to watch is the AUD/JPY (Aussie $ in yen terms), and this one shows at least some inkling of the risk trade is in play. 

But to more important economic realities, these currency fluctuations make it tough for global businesses to manage around and they also throw head fakes to economists.

For instance, take the latest GDP figure out of Germany, showing that economy grew at the fastest annualized rate since reunification – we know the global economy isn’t all that.  That growth was a result of a plunging euro value, sliding from 1.38 to 1.19 in dollar terms during the second quarter.  That slide created a very short-term boom to German exports and the growth number has people believing Germany will help drive global growth.  I wish it were true.  Unfortunately, the German economy will show its cracks again over the next couple of quarters and yet another false hope will prove…well, just that.

Have a great day!

Brent Vondera, Senior Analyst