Just as overseas concerns overwhelmed better domestic data on Tuesday, Wednesday we saw the inverse as a much better-than-expected jobless claims report overwhelmed what is clearly a domino effect situation in Europe; the broad market’s rally completely erased the prior session’s decline.  

The data was actually mixed as the jobless claims and income reports came in better-than-expected (much better in the case of claims), while durable goods and new home sales disappointed.  It was really that initial jobless claims number that got everyone’s attention, sliding close to the 400K level we’ve been talking about for a long time now. 

Industrials, consumer discretionary and tech led the market higher.  Utilities, telecoms and consumer staples were the laggards.  All 10 major groups did end the day higher. 

On the Irish front, the government outlined an austerity package that cuts government spending by 20% and raises various tax rates (although the key 12.5% corporate tax rate remains).  Their estimates on future deficit-to-GDP levels (attempting to slash the deficit from 12% of GDP to 3% by 2014) is based upon a close to 3% annual economic growth rate over the next four years, which seems a bit on the rosy side to me, but we’ll see.  And that’s assuming the banks don’t run into additional trouble because the actual current deficit/GDP sits at 32% when you add in the bailout. 

The CRB rallied back above the 300 mark, led by big moves in cotton, gasoline, heating oil, crude and sugar. 

Market Activity for November 24, 2010

A slew of data was released Wednesday because of the holiday and the bond market being closed on Friday, so I’ll just briefly touch on each release. 

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose 2.1% during week ended November 19, following the 14% in the prior week – the largest decline in a year. 

Applications to refinance fell 1% after plunging 16.5% in the previous week – the average contract interest rate on the 30-year mortgage rose to 4.50%, up from the record low of 4.21% hit a few weeks back.   However, apps to purchase a home surged 14.4% -- largest increase in two years – after falling 5.0% in the previous week.  This jump may have been driven by the increase in rates as buyers worried the cost of money may keep rising.

Durable Goods Orders

The Commerce Department reported that durable goods orders missed expectations by a wide margin as the headline figure fell 3.3% in October (0.1% was expected) and excluding transportation orders fell 2.7% (0.6% increase was expected).  But these did follow big upward revisions to September, which had headline orders up 5.0% and up 1.3% excluding transportation.

The weakest aspect of the report, on both a one month and multi-month look at this data, is in the business spending component – technically known as non-defense capital goods ex-aircraft.  These orders plunged 4.5% in October after the 1.9% increase in September and haven’t gone anywhere since May.  This has been an especially important part of the economy as consumer activity has been weaker than normal and the trade figures weigh on GDP.  The recent stagnation in this segment of durable goods orders may suggest that the inventory cycle has come to an end, a component that has boosted the GDP readingsw more than anything.

Personal Income & Spending

Personal incomes rose nicely in October, up 0.5% after coming in flat for September.  And the increase wasn’t all due to government transfer payments as the main private-sector component (wages & salaries) rose 0.6%. 

Personal income excluding transfer receipts have risen again after coming in flat for four months.

This degree of income increase is key for the economy as the next stage of household debt pay down must come from income growth rather than loan default.  (But keep in mind this remains a tricky and unusual economic situation.  More jobs and higher incomes will combine with higher input costs to erode profit margins – the pace of recovery is not yet sufficient to propel both profits and labor-market conditions). 

Spending rose 0.4% in October. The cash savings rate ticked up to 5.7% (as a % of disposable income) from 5.6% in September.

Jobless Claims

The Labor Department reported that initial jobless claims slid 34,000 to 407,000 (a decline to 435K was expected), following the 441,000 in the previous week – which was revised up from 339K and marks the 30^th upward revision out of the last 31 weeks.  The four-week average came in at 436,000, down 7,500.

Continuing claims also declined nicely as the standard issue of benefits fell 142,000 to 4.182 million and emergency level of benefits (those that extend out to 99 weeks) slid 262,400 to 4.664 million. 

Remember that these emergency level of claims expire at the end of the month, thus the 99ers likely began looking for jobs of late and the recent holiday retail job openings absorbed a lot of these seekers.

These two data sets -- personal income and jobless claims – exhibited nice moves and are very encouraging.  The combination of higher personal incomes and a meaningful decline among initial jobless claims to that 400K mark (a level we’ve been watching for a long time as it signals meaningful payroll growth is on the horizon). 

New Home Sales

The Commerce Department reported that new home sales came in well below expectations, down 8.1% in October to 283,000 units at a seasonally-adjusted annual rate (SAAR).  This follows a 12% increase in the prior month, but as the chart below suggests, the current level of 283K is just above the all-time low of 275K hit in August.

The months supply of new home rose to 8.6 from 7.9 in September.

The median price of a new home got crushed, down 13.9% month-over-month to $194,900 – down 9.4% from the year-ago level.

On an unadjusted basis (not seasonally adjusted), 23,000 new homes were sold in the U.S. during October – ties the record low hit in August.

University of Michigan Sentiment

The final print to the UofM’s consumer sentiment survey for November (recall we get two of these a month, the preliminary reading mid-month and the final at the end of month) was revised up to show a 2.3-point improvement.  The reading came in at 71.6 following the 67.7 in October.  Still, the measure remains below where we started the year and 4.6 points off of 2010’s best print, which occurred in June.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900