U.S. stocks began the first session of the final week of the year lower, pressured by additional credit tightening in China – the Shanghai Composite led international bourses lower overnight (well, Spain’s stock market was the hardest hit but that’s another situation as the Iberian Peninsula is seen as the next major shoe to drop in Euroland) and the U.S. market followed suit. 

But the direction of U.S. stock and bond markets reversed course a couple hours into official trading – the S&P 500 erased its losses as did the Treasury market where yields had been meaningfully higher in early trading.  In terms of stock prices, it appears traders are not quite ready to roll over.  For bonds, traders were guarded prior to the $35 billion 2-yr note auction, but after it went well they dropped their guard and the reversal was underway. 

The decision by the Chinese government to raise its key one-year deposit and lending rates took its toll on bourses around the world.  It’s not the degree of tightening, the rate increase was a mere 25 basis points, but that this marks the second hike in three months and signals the Chinese will remain in tightening mode (fearing increasing food costs and high-flying real estate prices will lead to social unrest).  The only thing that would halt this tightening campaign would be another market-disturbing event – ie. European debt contagion, U.S. home prices take another nasty turn down, or some exogenous event like Israel/Iran or a terror attack. 

Four of the 10 major S&P 500 industry groups gained ground for the day, led by financials.  Of the six that fell, consumer staples was the worst-performing group. 

The week between Christmas and New Years is always a light volume period, but was especially so on Monday due to the blizzard that hit the Northeast.  Volume on the NYSE Composite was extremely weak, less than 50% of average daily activity.  

Market Activity for December 27, 2010

Dallas Fed

The Dallas Fed survey decelerated to a reading of 12.8 (expected to accelerate to 17.0) for December from 16.2 in November.  The employment figures kept the measure from falling further as all other gauges deteriorated.    Factory activity in the 11^th Federal Reserve district, which is what this survey tracks, has been in expansion mode for three-straight months.  

New orders slid 7.5 points (and nearly back to contraction mode at just 1.6), unfilled orders fell back to negative territory, inventories remained in contraction mode for a sixth month, and the gap between prices paid and prices received expanded from an already wide margin.

However, there were some bright aspects of the report, all from the employment side of things.  The number of employees index jumped nine points to the highest level since 2007; the average workweek was up three points and wages up 4.5 points – but both below 2010 highs.  The new orders measure will have to bounce back though or these employment gains will prove short-lived. 

Week’s Data

Yesterday was a quiet session on the data front with just that little-watched Dallas Fed survey as the only release.  This morning we get the S&P CaseShiller Home Price results for October, which is expected to show the next round of price decline is upon us.  The index posted its third-straight month of decline in the September report, and down again on a year-over-year basis, a steady erosion since May when the y/o/y results hit +4.64%.  Eighteen of the 20 cities tracked by S&P CaseSHiller showed month-over-month price declines in the previous report. 

We also get the Conference Board’s consumer confidence reading for December.  This is the most important gauge on the subject and has shown improvement for two months.  I suspect it will make additional progress for December, thanks to stock-market gains – although the U of M consumer sentiment survey seems to follow the trend in stocks more closely than the Conference Board’s reading does.  It still has quite a way to go to get to the 2010 high mark of 62.7 hit in May, let along the 30-year average of 94.

Later today we receive the third major regional factory report for the month, this one from the Richmond Fed which tracks activity within the fifth Federal Reserve district.  It is expected to remain in expansion mode.

Then on Thursday we get initial jobless claims, a tough week to help us gauge the trend as it will involve the Christmas holiday; the final regional factory report (Chicago), and expected to remain hot; and pending home sales for November, expected to show a 1% increase after October’s 10.4% jump from very depressed levels – these are contract signings, which portend what official existing-home sales will do one-two months hence. 

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

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900