U.S. stocks bounced back yesterday from Tuesday’s decline with the broad market recouping a little more than half of that session’s losses.  The Federal Reserve’s latest economic report, which showed “widespread deterioration,” had little effect on sentiment – the market lost momentum after the report was released in the afternoon but held most of the day’s earlier gains.  It just confirms QE2 is coming…yes!

Headlines suggested that concerns over the European sovereign debt situation have ebbed again.  Well that was certainly a flash worry, as it was the major concern weighing on the prior session. 

Polish and Portuguese bond auctions saw increased demand, which reduced the latest bout of trepidation that EU governments will have a problem funding their deficits.  But the Polish situation isn’t one of the more trouble spots (Polish CDS, or insurance against default, trade at half that of Portugal and are significantly lower than that of Spain and Italy).  Regarding Portugal and the other more financially troubled sovereigns, I wouldn’t be surprised to eventually learn that those governments have diverted funds to buy their own bonds.  Certainly, the fact that the ECB continues to accept government bonds, no matter the credit rating, as collateral for central-bank emergency loans is also helping those auctions as banks feel free to buy ‘em up.  Problem is you can’t mask realities forever.

Then we had the Irish government come in and break up the nationalized Anglo Irish Bank in an attempt to assuage investors regarding their debt crisis and a further run on deposits.  The bank will be split in two – one managing the deposit side and the other holding all of their bad assets until a time comes to sell them off.  I read somewhere yesterday that the bank’s loan book is as troubled as it gets as less than 20% of those loans are performing – no problem there. 

Financials, industrials and energy led the advance.  Consumer staples and utilities were the laggards – staples being the only major group to decline for the session. 

Volume was weak again, 35% below the six-month average.

Market Activity for September 8, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell for the first week in six, but the purchases side of things showed its best bounce since the week ended June 11.

The overall index was driven lower by a 3.1% decline in refinancing activity (which accounted for 82% of the mortgage volume last week) as the average contract interest rate on the 30-year fixed mortgage rose to 4.50% from 4.43% the week prior – a surprising move since the underlying Fannie Mae commitment rate fell to its lowest level on record mid week.

Purchases showed nice activity though, up 6.3% for the week.  Nice to see that, but we’ll need such activity to extend out in a durable fashion – of which job growth is a necessary condition.  Unless, of course, we see a return of the home buyers tax credit.  This will likely boost sales again, but only temporarily as everyone watching knows by now – extending the period of Great Delay.

Beige Book

Reports from the twelve Federal Reserve districts suggested national economic growth continued in the six weeks ended August 31, but with “widespread deterioration compared to preceding periods.”  Nothing we haven’t talked about many times here.

Most of the weakening took place in the New York, Philadelphia, Richmond, Atlanta and Chicago districts.

Consumer spending trends were mixed but overall showed a slight increase in retail sales.  “Several districts noted an emphasis on necessities and lower-priced goods.”  Some districts pointed to continued softness in tourism; most reported consistent gains.

Manufacturing activity expanded overall, but “the pace of growth slowed.”

Residential real estate markets declined further in the back-half of July and August.  Overall commercial real estate fundamentals remained depressed.

Lending activity was stable to slightly lower as most districts reported little or no change from low levels within commercial and industrial lending as “businesses remained quite cautious about expansion plans.”  Consumer lending stayed “sluggish” over the most recent six-week Fed assessment. 

Price activity remained flat, with the exception of selected food commodities and industrial materials.  Wage pressures remained modest as most districts reported little if any increase in wages. 

Firms continued to focus on temporary hiring and contract workers on balance. Boston was the only district to report a transition to more permanent workers.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900