U.S. stocks gained ground for a second-straight session yesterday after the latest print on initial jobless claims fell 19,000 more than expected, although we’re likely to see a substantial revision next week – we’ll touch on the reason why below. 

A narrowing in the headline trade balance also helped market sentiment.  I make a point of the headline figure because that’s what everyone watches.  The quarter-over-quarter price-adjusted change in the figure is what matters for the GDP report and on that basis the trade number came in basically unchanged from the prior quarter’s average. 

Stocks lost much of their morning momentum after lunch but recovered from the day’s low point in the final hour of trading.

Telecoms, health-care and financials led the market higher   Financials were helped by hopes that international regulators will set less onerous (than expected) capital requirement on the banking system as they meet in Basel Switzerland this weekend – but any more stringent requirements are several years off.    

Basic materials (only group lower on the session) and consumer discretionary shares were the laggards.  Utilities, consumer staples and energy were in the middle of the pack.

Volume remained lackluster for a third-straight session, 32% below the six-month average. 

Speaking of weak activity, you’ve got to check out this story in today’s WSJ.  It’s about this proprietary trading firm in which the traders take 11-2 off each day to play tennis, take long lunches and visit their kids at school.  One day they walked five miles to try a pizza joint.  Since most of the trading activity is taking place during the first and final hours of the day they wonder “what’s the point?” of being around mid-day.  During the May 6 flash crash they were at the movies.  That’s classic.

Market Activity for September 9, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 27,000 in the week ended September 4 to 451,000 (470K was expected ) after no change in the previous week – that was revised up from an originally reported decline of 5,000, and next week’s revision could be s doozy as I’ll explain below.  The four-week average of claims fell to 477,750 from 487,000 in the prior week.

Continuing claims rose on balance as the standard issue fell 2,000 (those that last the traditional 26 weeks) to 4.478 million, while emergency claims (those that extend out to as long as 99 weeks) rose 29,300 to 5.469 million.

It’s amazing what the old market gets excited about these days, but then again everything is relative.  Initial claims have dropped back to the low end of the recent range; however, that range has been pushed higher over the past nine reporting weeks. 

We may also see quite the revision to this data next week as the Labor Department stated that eight states (CA, IL, ID, HI, OK, MI, VA, WA and DC) didn’t file claims data due to the Labor Day holiday, so those figures were estimated – three of which have jobless rates between 10.3% and 13.1%.  Maybe those estimates will prove to be accurate, but we won’t ultimately know until next week whether we even fell back to 450K – an already high level in and of itself. 

What will get me excited?  A consistent move down to the 425K level (a spot that has preceded summary moves back above 450K) and then on to 400K.  That is the level – 400K – that begins to signal some form of durable jobs growth is coming. 

Trade Balance

The Commerce Department reported that the trade deficit narrowed much more than expected in July, which will be helpful to third-quarter GDP if the trend continues.  The narrowing was delivered by a 1.8% increase in exports, while imports slid 2.1% after two months of big gains – a function of firms restocking for back-to-school season and businesses boosting capital equipment purchases, which we know was strong in the second quarter.

The deficit narrowed by 14% to $42.775 billion after widening by 19% in June.  Adjusting for price, which is what counts for the GDP report, the trade deficit narrowed by 11% to $47.693 billion.  This level compares to an average of -$47.9 billion in the previous quarter so we will have to see continued narrowing to help third-quarter GDP.  But the beginning of a downtrend on the import side doesn’t exactly signal an improvement in final domestic demand. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900