U.S. stocks ended mixed as the Dow closed a bit higher, the broad market closed fractionally lower and the NASDAQ Composite pulled back in a more substantial manner.

You can’t really expect too much after the prior session’s run up, but the latest growth forecast didn’t help matters as the IMF reduced its U.S. GDP estimates for the next six quarters.  Although one would think this to spark a rally with the current euphoria over Fed stimulus as lower forecasts would mean more cargo drops of newly minted greenbacks, but it was not to be.

The IMF reduced their GDP forecasts for the rest of 2010 and 2011, lowering the current year to 2.6% from their earlier forecast of 3.3% and 2011 down to 2.3% from the previous of 2.9%.  You may remember us explaining a few months back what a joke those forecasts were, and unfortunately the 2.6% for the current year seems high.  Based on how things look right now, I’m going to say we’ll be lucky to get 2.2%.   For 2011, we’ll definitely take their 2.3% estimate, because if we endure even a very mild negative GDP print in the first half (which I think is inescapable) we’ll have to hit our long-term growth rate of 3.3% in the back half  just to get close to their full year forecast. The IMF is beginning to wean itself from its recent bout of hopium dependency; after a few more months in reality rehab they’ll have fully kicked the habit. 

Four of the 10 major industry groups did close higher for the session, led by energy and basic materials – no surprise there as the dollar got clocked again yesterday and is enduring further abuse this morning.   Telecoms and tech led the six groups that declined.

Earlier in the week I mentioned that Alcoa will kick off the earnings season today, which is the traditional opening act.  That’s wrong as Pepsi will front the aluminum producer.  Not sure what the deal is with that, maybe they’ll start to kick things off for now on, which does makes a lot more sense than Alcoa doing so. 

Market Activity for October 6, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their mortgage applications index fell 0.2% for the week ended October 1, following the 0.8% decline in the previous week – the index has declined for four-straight weeks.

Refinancing activity held the overall index down yet again.  Refis fell 2.5% last week even as the average contract interest rate on the 30-year fixed mortgage fell to a new record of 4.25%.  As we’ve been talking about, those who can refi already have and the next stop they’re looking for is that 4.00%-4.25% range.  Now that we’ve hit 4.25%, on average, homeowners may have lowered their target refi range after the Fed’s made clear they’ll do whatever it takes to drive rates even lower.  Surely, much of the policy path the Fed has signaled has already been priced into the market, but when they actually get to QE2 it should drive rates down a bit more. 

Applications to purchase a home jumped 9.3% last week, which is great news.  It doesn’t have much effect on the overall index though as purchases only account for 21% of the index at this point.

ADP Employment Change

The job survey for September from payroll outsourcing firm Automatic Data Processing measured that private-sector payrolls declined 39,000 – the number was expected to rise 20,000.  This marks the first decline since January.

This should really get the equity markets fired up as bad has become good with regard to the amount of money Bernanke will funnel to the primary dealers and the overall market via unconventional asset purchases. 

Now, ADP has not been accurate in predicting what the official government data on employment prints (we get the official report tomorrow). But what it does do pretty well is provide a good look at the degree of change within the official private-sector payroll survey a couple of months hence.  That doesn’t mean that the number moves from positive to negative, as ADP has, but it does suggest that the pace of payroll increase will at least wane – and with private-sector payrolls up just 67,000 in August we can hardly afford it to get weaker.

According to ADP, goods-producing industries shed 45,000 positions last month.  Manufacturing cut 17,000 and construction slashed another 28,000.  Service-providing industries added 6,000 positions. 

Large firms (defined by having 500 or more employees) eliminated 11,000 jobs; medium firms (50-499 employees) saw employment decline by 14,000; and small firms cut payrolls by 14,000.

So we get the official payroll numbers tomorrow.  The consensus estimate is for no change in total payrolls (due to the continued census firings) and for private-sector payrolls to rise 75,000.  ADP suggests something lighter than this. 

And remember, these figures are subject to big revisions.  The previous month’s report showed a 67,000 rise in private-sector payrolls, which is not even close to a number needed to bring the jobless rate lower but it did outpace expectations.  As a result of that better-than-expected reading, many began to talk about the double-dip scenario being taken off the table.  I thought that was a ridiculous claim simply because one month’s worth of data can’t bring one to such a conclusion, despite the fact that a 67K pick up is weak.  We’ll find out tomorrow if that number actually beat expectations via the revision.  Maybe it is revised higher.  But it would take a considerably higher revision along with a huge increase for the current month to get anyone excited about labor market conditions.  And if it is revised lower, then it makes all of those musings that double-dip is no longer in play look as silly as they should have been viewed when initially uttered. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900