U.S. stocks bounced between gain and loss several times on Thursday but a late-session move to the upside delivered the broad market into positive territory by the close.  Shares of 3M held the Dow Industrial Average back as the stock fell 6.5% (44.35 Dow points) after the company reduced its profit forecast due to acquisitions and pension expenses.

Commodity prices on the whole rose as the CRB nearly made it back to the 300 mark (it dipped below that level on Wednesday), fueled by rallies in natural gas, orange juice, silver, wheat and gold. 

Health care, consumer discretionary and consumer staple shares led the broad market higher.  Industrials, basic materials, financials and energy were the laggards.

On a very interesting note, the Federal Reserve sent an inquiry to the primary dealers (banks and broker-dealers that trade directly with the Fed and assist in conducting monetary policy) asking about expectations on QE2 and their opinions on how various degrees of asset purchases would affect yields.  One hopes this was just an inquiry on expectations, but it sure seemed like they were looking for input as to how much they should do – how big QE2 should be in the first six months of buying.  With the decision less than a week away (not officially, but since the market expects it they better deliver the specifics on Wednesday when their meeting adjourns), one would hope they’ve already got the number. 

Sorry, but I think Bernanke is stabbing in the dark here as he tries to kill his deflationary demons – tilting at windmills as Cervantes would put it.  Sure the economy is weak, a reality of high debt levels and the chaos created by past monetary policy mistakes, but this is very much the wrong way to attack the situation.  And things would have to become considerably worse in my view for full-blown deflation to result.  Of course, Bernanke is getting zero help from fiscal policy – at least in any common sense regard – and this is likely playing a role in his decision to go nuclear.

Market Activity for October 28, 2010

Jobless Claims

The Labor Department reported that initial jobless claims slid 21,000 to 434,000 (expected to come in at 455K) in the week ended October 23, marking the second-straight weekly 20K-plus decline. The prior week was revised up a touch to 455,000 from the 452,000 reported last week – marks the 26^th of the past 27 weeks in which claims have been revised higher.

So the figure has once again pulled back from the 475-480K level to sub-450K.  This latest move is the fifth time in nine months in which initial claims have fallen below 450K.  Is this the time we make that move to 400K (a vital level that would suggest consistent and meaningful monthly job gains have finally arrived)?  I have my doubts, especially with the early signs of input costs pressuring margins. 

The four-week average of initial claims fell 5,500 to 453,250.

Continuing claims also declined as both the standard issue (those that last 26 weeks) and emergency claims (those that last up to 99 weeks) showed improvement.  Standard claims fell 122,000 to 4.356 million and emergency claims fell 414,000 to 4.657 million. 

While the emergency claims have declined a bit over the past month, the fact that they keep vacillating each week (one up, one down) means there hasn’t been much progress made.  But emergency claims will collapse soon enough, maybe not because job growth is firing on all cylinders and thus the long-term unemployment problem has been erased, but because they expire in November.  Unless they are extended again, which is unlikely if the soon-to-be elections result turn out as most people believe, consumer activity will have to show the effects – but you can’t prop activity up forever.  

In total, on a relative basis this is a good report.  If we can get several weeks of improvement and that initial claims figure back to 400K, we should see job growth that is sufficient to absorb the re-entry of discouraged workers, at least keeping the unemployment rate from rising.   If we move back to 450K though, we’ll watch the official jobless rate rise back to 10% (currently 9.6%). 

Big Day

We’ll get some big releases today as the first look at third-quarter GDP, the latest from Chicago-area manufacturing, and the final revision to October University of Michigan sentiment arrive.

GDP is expected to come at 2.0%, which follows the 1.7% in the second quarter – I’ll note though that this is the advance look; there will be two more major revisions and remember the previous quarter’s reading began at 2.4% and ended at 1.7% by the time of the second revision.  What we need to see here is an uptick in the real final sales figure (which excludes inventories and gives us a sense of final demand).  The reading has averaged just 1.13% since the economy technically pulled out of recession in June 2009 – this measure usually ranges 4%-5% in the first year of recovery. 

On Chicago, we’ll need a good reading, which is expected, to corroborate what the other regional reports (on average) have signaled for October thus far.  We have seen a pullback in vehicle orders within the durable goods reports and I’m waiting for this to hit the Chicago reading – the most important regional factory-activity survey.

Finally, the UofM will release the revision to its consumer sentiment gauge for October.  As a result, one shouldn’t expect anything hugely surprising, we’ll just watch to see with direction the revision comes in. 

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Have a great weekend!

Brent Vondera, Senior Analyst