U.S. stocks were headed lower for a third session as European troubles, China’s interest-rate hikes, and a dollar rally overwhelmed a much better-than-expected jobless claims report.  (You may wonder why a higher dollar would cause stocks to fall, since this is certainly not the case during normal times.  The answer is we’re in Algo Country -- computerized program trading -- and those algorithms are set to buy stocks when the dollar falls, and sell when it rises.  Programs are set up this way because in this environment a higher dollar means trouble as traders are running for safety, thus the sell signal).

But the major indices reversed course in the afternoon after the latest 30-year bond auction saw the weakest demand in a year and caused the dollar to reverse course. Oh, the Fed also reminded everyone that they’re in the game by announcing they’ll be injecting more money into the primary dealers – Bernanke and the NY Fed’s Dudley surely didn’t like the way the long bond reacted to that auction.  At that point stocks and bonds  rallied. 

Financials, energy and consumer discretionary shares led the market higher.  Utility and consumer staple shares were the worst performers. 

The worst 30-year Treasury auction in a year resulted in the long-end of the curve selling off pretty hard (sending yields higher).  The 10-year yield was a full 9 basis points higher from when Bernanke first began to signal QE2 was coming, which was August 26 – that yield was 2.66% on August 26 and just following that 30-yr auction it jumped to 2.75% (bad news for mortgage rates as it has 4.40% written all over it – what a time we’re in when a 4.40% 30-yr MTGE is seen as high).  The 30-year T-bond hit a yield of 4.31%. 

But things change quickly these days and traders were reminded that the 800 lb Fed gorilla is there and will be buying $105 billion over the next month (first round of QE2) – the NY Fed announced these operation directly after that auction, hardly a coincidence I’m sure; thus bonds rallied again (yields retreated) to actually close higher (in price).  How easy; why hadn’t we thought of this sort of thing sooner?

And speaking of government bonds, Irish spreads continue to blow out; the European peripherals (of which Ireland has become the poster child) are in big trouble and we’re going to see the EU/IMF bailout kick in the very near future. 

Market Activity for November 10, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose 5.8% for the week ended November 5 after the 5.0% decline in the previous week.  Surprising, refinancing activity rose even as the average contract interest rate on the 30-year mortgage held steady at 4.28% -- surprising because it seemed home owners were waiting for a move below the 4.20% mark to engage in more refi activity.  This increase in refi activity may have been a function of people taking advantage of the Freddie Mac program that allows borrowers to refi even if their LTV is as high as 125%.  Obviously these borrowers would otherwise be shut out from the refi process. 

Those applications to refinance rose 6.0%, following the 6.4% decline in the prior week.  Purchases rose for a third-straight week, up 5.5% for this report, which follows the 1.4% increase for the week ended October 29. 

We’ll see these applications to purchase a home show up in the official existing home sales data in the back-half of November, probably not really becoming evident until the December report.  Purchases have a long way to go though. 

Jobless Claims

The Labor Department reported that initial jobless claims fell 24,000 to 435,000 (expected to fall to just 450K), following an upwardly revised 459,000 (previously reported at 457,000) in the prior week – the upward revision is the 28^th of the past 29 weeks.  The four-week average of initial claims fell 10,000 to 446,500.

Continuing claims also fell as both the standard issue and emergency level of benefits declined.  Standard claims (those that last for the first 26 weeks of unemployment) fell 86,000 to 4.301 million, while the emergency claims (those that extend benefits out to as long as 99 weeks) declined 285,924 (erasing 80% of the prior week’s increase) to 4.727 million.

So, initial claim fell back below that 450K (which is viewed as an elevated level that we’ve been waiting to leave in the dust) and this is the quickest move back below that mark since we’ve been vacillating around it.  That is, over the past nine months when we’ve bounced back above 450K claims they would remain above that level for a few weeks.  This time the bounce lasted only one week and could be signaling a new lower trend may have emerged.  Anything above 400K is fairly unhelpful due to the level of job growth we need, but improvement is improvement. 

On continuing claims, they fell in the latest week but have made little progress as they’ve hovered around this 4.7-5.0 million level for a long time now.  That is about to change as these emergency level of benefits will expire at the end of the month.  (Maybe the lame duck Congress extends them yet again, but the 112^th Congress that arrives in January is not going to keep this welfare going.)  At which point, we’ll need to see initials trend down to 400K or the job growth is not going to be sufficient to absorb these people and we’ll see it show up in retail sales as the long nature of these benefits has certainly helped to boost spending.  Although, as long as stocks hold to these levels the more affluent consumer should help to ease this weakness.

Trade Balance

The Commerce Department reported that the trade gap for September narrowed more than expected to -$44.0 billion (expected to come in at -$45.0B) after the -$46.3 billion for August.  This may help the revision to Q2 GDP a bit (in the initial GDP report trade subtracted 2 percentage points from growth).  While it should very mildly help the revision, from an absolute standpoint it will still weigh on GDP as the gap was wider than that of the previous quarter. 

I wouldn’t get too excited about the narrowing though (besides, conventional economists spend way too much time worrying about trade gaps; they’re not an issue so long as the economy is strong enough to attract capital, thus those dollars that we send overseas come back to us in the form of vital capital that finance growth.  Instead, it is pro-growth policies we should be focused on; the rest takes care of itself).  The narrowing occurred not because exports were robust, but because imports fell hard – exports have stalled for three months.

Exports rose just 0.3% for September after no change in August.  Big moves down in capital goods exports and industrial supplies hurt U.S. exports for the month. Agricultural goods were up a big 5.1%, which followed a 16.1% jump in August.  Some readers may remember us harping on how the U.S. must focus on farming to boost export activity – this is where it’s going to be, which means we’ll need to break down old subsidies that in an overall sense pays wealthy large-business farms not to grow crops. 

Imports slid 1.0%, which follows a 2.0% increase in August but is net down for the past three reporting months as July was down 2.1%.  A large 4.4% decline for consumer goods – net down for the last three months – is what hurt the figure.  And it would have been worse if not for a 172% jump in commercial aircraft. 

For the near term, a narrower trade balance is important (narrower boosts GDP) as we’ve got other areas of weakness and the recent areas of strength appear to be on the wane.  However, if you achieve the narrowing merely from lower import activity (instead of strong export figures) then the boost from trade that GDP receives is simply offset by weaker personal consumption and inventory data over the following quarters. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900