News that the ECB (European Central Bank) will extend and expand its securities purchases along with solid-to-strong PMI (manufacturing data), both domestically and overseas, helped propel stocks on Wednesday – although by the way futures had priced things in pre-market it appears most of the rally was driven by that ECB news. 

ECB’s purchases have certainly helped European government debt spreads from blowing out even more (their buying has kept interest rates from rising even more than they have).  ECB President Trichet grows increasingly concerned that pressure will continue on Italy – an economy that if had to be bailed out would bring the financial pressure to a whole new level – and feels forced to backstop markets to a greater extent.  (And one has to give it to the central banks.  They continue to successfully bring traders back to the risk trade even though their ever-extending policy actions do nothing to solve the problem, they only kick the can down the road; and one must acknowledge that there is at least the potential for these policies to deliver greater hardship over time.)

On the manufacturing data, it continues to confound me.  The numbers we’re seeing typically correspond with robust global growth, yet we’re running at half a robust rate.  Chinese manufacturing expanded, which I can see as they continue to build their Potemkin Villages – yeah, there’s undoubtedly useful building that is occurring, but there is surely also a great deal of facility glut, if you will.  But the numbers we’re seeing in the U.S. don’t match up with overall growth and the latest manufacturing activity in Britain expanded to the highest level in 16 years.  Either these figures are going slide in the coming months or GDP will pop to a much higher level.  I don’t see how the latter occurs, but guess we’ll just have to wait and see.

The high cyclicals ruled the day as energy, basic materials and industrials were the top-performing groups.  Telecom and utility shares were the laggards, but all 10 of the major groups did gain ground for the session. 

The CRB jumped 2.5%, led by wheat, corn and the energy complex.  Crude is pushing toward $90/barrel again, closing at $86.75. 

Market Activity for December 1, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index slid 16.5% last week, following a 2.1% increase in the prior week.  The figure was pushed lower by a 21.6% plunge in refinancing activity.

Applications to refi a mortgage have dropped big time over the past three months as the average contract interest rate on the 30-year mortgage has jumped to a three-month high of 4.56% -- it hit an all-time low of 4.21% in early October. 

Apps to purchase a home rose 1.1% last week after jumping 14.4% in the prior week. 

Friday’s employment report is likely to show the trend in payroll growth has increased of late.  So the recent increase in purchases is either due to this additional labor-market repair or simply buyers worried that the rise in rates won’t ease and they’re getting in before they go higher.  Obviously, if it’s the former then the chart below will continue to show improvement.  If it’s the latter, then this is likely just another short-term pop that leaves the purchases data at very low levels.

ADP Employment

The November private-sector payroll survey from outsourcing firm ADP estimated an increase of 93,000 for November (beating the 70K expected) after an 82,000 increase for October.  We watch this ADP data, but it has become pretty useless again so I wouldn’t place too much emphasis on it.  (I’ve tried to give it the benefit of the doubt lately – long-term readers may remember me disparaging this report a few years back as it failed to track official numbers.)  That is, it has done a terrible job of projecting what’s going to occur when the official data is released, always two days after ADP.  There was a short period of time – when the labor market was in free fall late/2008-2009 – when ADP accurately predicted what would occur within the official data, but it’s forecasting ability has pretty much failed again so I don’t think one can offer a suggestion for Friday’s reading based on this report)

The estimate for tomorrow’s official payroll reading is for an increase of 145,000, but the whisper number is probably closer to 200K.  Based on what we’ve seen from initial jobless claims of late and the peak of holiday retail hiring I wouldn’t rule out an increase of closer to 250K.  The unemployment rate is expected to remain unchanged at 9.6%.  Basically we need payroll growth in the 300K/month range for a full year to consistently send the jobless rate lower a year from now. 

ISM Manufacturing

The Institute for Supply Management’s gauge of manufacturing activity for November came in at 56.6, down slightly from the 56.9 for October.  This was line with the stated estimate of 56.5, but the whisper number was surely closer to 60 after the reading from Chicago we received on Tuesday.

The internals of the report were good, as they must be for a number in the mid-50s.  The new orders measure slipped 2.5 points to 56.6, but this is a good level; supplier deliveries rose 6 points to 57.2 (meaning suppliers were having more trouble keeping up with orders); employment held in the 57 handle; new export orders fell but held at a strong level of 57.0; and the inventories gauge increased 3 points to 56.7, making these factory gauges even more puzzling as the regionals have shown the opposite.  

On the negative side of things, the backlog of orders measure held at 46.0, but that is contraction mode – the figure has been below 50 (signaling contraction) for three months.  This is the weakest aspect of the report as it shows any back-to-back weakness in new orders will result in a decline in production.  The number of industries reporting an increase in production was cut in half in November. 

Prices paid by manufacturers eased off a bit, down 1.5 points to 69.5.  This remains well above the 25-year average of 58.5 but any improvement is welcome. 

Overall the factory sector remains strong, near robust (it takes something very close to 60 to actual term activity robust).  I continue to wait for this sector to show weakness due to the weaker durable goods numbers (namely, the stall within the business spending component) and what appears also be a stalling of the inventory cycle.  Instead, factory output carries on. 

Beige Book

The latest compilation of economic conditions within the 12 Federal Reserve districts, known as the Beige Book, reported that economic conditions continued to improve during the early/October- mid/November period.  Activity in Boston, Cleveland, Atlanta, Dallas and San Francisco increased at a slight to moderate pace; economic conditions increased at a somewhat stronger pace in New York, Richmond, Chicago, Minneapolis, and Kansas City; and activity was mixed in Philadelphia and St. Louis. 

Manufacturing activity continued to expand in almost all districts, driven by metal fabrication and auto assemblies. 

Reports showed steady to increasing activity for professional and nonfinancial services.  Two districts noted a decline in demand from government agencies, probably an early sign of the inevitable.

Reports on consumer spending tended to be positive but weakened a bit over the past six weeks, according to the Fed.  Overall, consumers remained value conscious.  However vehicles sales were stronger in nine districts and tourism was stronger in most districts. 

Commercial real estate remained at low levels – flat demand and high vacancy rates.

Agricultural conditions were favorable, driven by exports (and a Fed policy that’s jacked prices higher).

The energy sector continued to expand.

Demand for commercial and industrial loans and consumer lending remained stable at weak levels in most districts.

Prices for final goods and services were stable, despite rising input costs via agricultural commodities, metals and fuel.  (There’s that profit margin trouble we’ve been talking about if firms remain unable to raise final prices.)

Hiring activity showed some improvement, but employers reportedly are waiting from clearer signals of expanding business prospects before adding significantly to payrolls. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900