U.S. stocks gave back much of their earlier gains late in Wednesday’s session, but held on to close positive.  There wasn’t much news with which to trade on yesterday, but we didn’t need any as traders seem determined to add to December’s rally, now at 6.7% in terms of the S&P 500.

Energy and basic material shares led the way again.  The laggards were financials, utilities and industrials. 

The CRB Index slipped yesterday as declines in the prices of cotton, sugar and aluminum weighed on the index; higher price for nickel, hogs, OJ and silver made sure the pullback was fractional.  Since Bernanke gave speculators the good-to-go signal on August 27 via that Jackson Holes speech, the CRB is up 26.5%.

Well, that thin liquidity that everyone seemed to blame for Tuesday’s poor $35 billion 5-yr auction result surely didn’t hurt yesterday’s $29 billion 7-yr auction.  In fact, the result was strong demand.  The bond market rallied and erased Tuesday’s entire jump in rates. 

The fact that the Treasury is bringing $200 billion in debt (either new issuance or refinancing) during the final week of the year (when volume is always light) shows the financing straits the U.S. government has gotten itself into.  But those thinking that rates were going to rise in a secular fashion, simply because of the spike from extremely low levels that occurred in the four weeks ended December 15, are finding that a durable move is unlikely to occur, just yet – and I emphasize just yet.  Longer-term Treasury rates couldn’t even hold the 3.55% on the 10-yr that they most-recently peaked at on December 15 (back down to 3.35% as of yesterday), much less the 2010 peak of 4.00% hit on April 5.  The economy is too weak, the durability of the recovery too precarious and the Fed is still manipulating the market in a big way. 

Market Activity for December 29, 2010

Extended Vacation

We normally receive the weekly mortgage applications report on Wednesdays, but not this week.  I looked back thinking maybe I’d forgotten that the Mortgage Bankers Association doesn’t report applications activity for the Christmas holiday week, but this appears to be the first time they’ve skipped.  I called them to see what was up and got a recording that they’re closed for the holidays.  Considering the latest 50% plunge in mortgage apps (over the last two months), a week-long holiday vacation seems to make sense. 

Here’s what the purchases side of things looks like. 

Year-End Data

This morning we’ll get initial jobless claims, Chicago PMI for December and November’s pending home sales to round out the data releases for 2010. 

On jobless claims, we’ll watch for initial claims to finally make that push and trend to 400K – a vital step to get us to sub-400K and a clear sign that more substantial (and importantly more durable) payroll growth is upon us.  We first broke through the 450K trend in mid November, which took way too long to accomplish; hopefully we make a real run for sub 400K at a much faster pace.    We’ll also look for continuing claims to make additional progress.  At the current 8.6 million in continuing claims, the data illustrates that the long-term unemployment problem persists. 

On Chicago PMI (the most important regional factory report), it is expected to remain at a hot level – the measure has printed readings of 60-plus for three-straight months and seven of the past 11 months.  The regionals we’ve received for December thus far offer every indication Chicago remained hot.  A key aspect of the report we’ll be watching the price paid measure, which has also returned to high levels.  As firms have little pricing power, higher input costs will create trouble for profit margins. 

Finally, pending home sales are expected to come in pretty much flat after October’s 10.4% jump from depressed levels.  This report tracks contract signings for existing-home purchases, so since these sales are officially counted when the contract closes this data offers a good indication of what sales will look like for December.  Due to the supply problems the market faces we need sales to rise consistently to absorb supply or prices will endure another round of decline.  (I doubt we can gain durable traction before job creation really takes off; without this the banking sector’s loan book will remain intensely challenged.) 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900