U.S. stocks slid in the final half hour of trading to close lower yesterday, but the session’s losses were mild considering the day’s economic reports had trouble written all over them.  The move at the end of trading was disturbing, but the day should be viewed as a victory merely because the market held much of Friday’s big gains. 

Telecom and utility shares were the best-performing sectors, and the only of the major 10 groups to close higher for the day.  Financials, industrials and health care were the laggards.

Volume was weak again, 26% below the six-month average. 

The latest talk on the next round of quantitative easing is that the Fed may refrain from a “big bang” approach.  Rather than announce they’ll begin a $1-2 trillion bond-buying campaign, they may just take a more measured approach by purchasing $100 billion/month and watching to see how much more they’ll have to do.  What Bernanke & Co. are doing is floating trial balloons to watch how the market reacts -- they formerly used Greg Ip when he was with the WSJ (now a writer for The Economist) as their sounding board, but now it appears to be the WSJ’s Jon Hilsenrath.  As I’ve stated many times, the last thing they want to do is scare the market; keeping the Dow above the 10K mark has to be vitally important to them right now, not just with regard to total household wealth but also because sub-10K means the affluent consumer takes a breather. 

But QE2 isn’t going to work with regard to delivering a level of economic escape velocity that pulls us out of this period of malaise, which means they’ll likely end up extending their monthly purchases of Treasury bonds (and who knows what other securities) to a point that amounts to the $1 trillion number anyway.  And it’s interesting to understand that the Treasury is issuing just about $100 billion in debt/month, so the fact that people are talking about that exact number gives energy to those who have predicted the Fed is going to all-out monetize the debt.  And add in the $300 billion or so in pay downs from the mortgage-bond holdings on the Bernanke balance sheet (which he already has signaled will be re-invested) and you get to the middle of that $1-2 trillion range in QE2 that many have estimated.

Market Activity for September 27, 2010

Chicago Fed National Activity

Not to be confused with Chicago PMI (the regional manufacturing survey), this national activity survey from the Chicago Federal Reserve Bank is meant to measure overall economic trends for the nation. 

The reading for August came in at -0.53 after July’s downwardly revised -0.11.  These prints follow the -0.63 for June and marks the fourth-straight month of negativity as May was mildly negative at -0.06.

What this index has been constructed to tell us is not very intuitive so let me explain.  First, there are levels that the Chicago Fed watches two years into an expansion, so these levels don’t apply because we are not at that point in the cycle.  So what we’re watching are two levels – readings of +0.20 and -0.70. Readings of +0.20 following a period of economic contraction are meant to show that the recession has ended.  Readings of -0.70 following a period of economic recovery are meant to show an increased likelihood that a recession has begun.

This gauge of activity ended its 29-month stretch of negative readings in November 2009 and since then the index has posted three positive readings, but only one that was higher than +0.20 (April’s +0.36).  So the measure was correct in corroborating that the recession had ended, at least for that one month.  The problem is that over the past four months the index has turned negative again with two of these readings way too close for comfort to that -0.70 level (-0.63 in June and -0.53 for August). 

Thus, here we are with yet another indication that the economic recovery is proving to be extremely transitory and the risk of dipping into recession again is elevated. 

Dallas Fed

On top of that Chicago Fed number, the latest regional factory activity index for September came in well-below expectations, sliding to a reading of -17.7 (-6.0 was expected) after August’s -13.5.  This is not one of the more important regional factory surveys in my view (New York, Philly, Richmond and Chicago are the big ones) but it does continue the trend that’s played out – what has been the strongest economic sector, manufacturing,  is weakening.

Dallas factory activity has been in contraction mode for four months now and it is surely being adversely affected by the deep-sea drilling moratorium.  That said, this weakness is hardly in isolation as all regions have consistently trended lower over the past six months.  For September, New York slowed to 4 from 30 back in April and  Philly has slipped to contraction mode from a hot reading of 20 in April.  We get Richmond’s results today and Chicago (the biggest of them all) on Thursday.  

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900