Major U.S. stock indices decided to take a breather on what was arguably the best day of the year in terms of economic data results.  One can come up with a few reasons why stocks weren’t stimulated by a 300K handle on initial jobless claims and a towering 68 print from Chicago PMI, led by the possibility that too good is a bit disturbing for an equity market that has priced in a long duration for ultra-easy monetary policy. 

While there were caveats to both of the days big economic news stories, initial jobless claims and Chicago PMI posted the best readings since the financial crisis began with regard to the former and the best results in 22 years for the latter.  As hot as Chicago PMI was, the headline number on initial jobless claims was what made this the best day of the year as they finally dipped below the key 400K mark.

The CRB Index slipped with stocks as the precious metals and energy complex saw prices decline.  Energy price pulled back a bit as the weekly energy report showed crude stockpiles fell half the level expected and distillates (heating oil and diesel) saw supplies build.

Best performers were energy and telecoms, the only of the top 10 industry groups to close up for the day.  The laggards were financials, health care and tech. 

Volume remains weak as one would expect for this final week of the year.   Activity on the NYSE Composite came in at half of the weaker-than-usual six-month average. 

Market Activity for December 30, 2010

Jobless Claims

The Labor Department reported that initial jobless claims slid 34K to 388,000 for the week ended December 25 (415K was expected), following an upwardly revised 422,000 in the previous week.  This is the lowest level since July 2008 and the first time since the crisis began in which we’ve moved below 400K.  One must be cautious though to read too much into this just yet.  As we saw with the previous two Christmas and New Year’s weeks, initial claims come down meaningfully only to rise again in the subsequent weeks. These are seasonally-adjusted numbers, but the Labor Department sometimes has a hard time getting the adjustment right.

The four-week average came down a very nice 12K to 414,000.

Continuing claims also looked good on balance.  The standard issue (covering the first 26 weeks of benefits) rose 57K to 4.128 million.  While up, it wasn’t up enough to erase the 96K decline in the previous week – so progress made there.  Emergency claims (those that take bennies out to as long as 99 weeks) fell 150K to 4.530 million.  This marks two months in a row of decline and while total continuing claims remain sky high at 8.6 million there is improvement. 

Bottom line:  We’ll watch initial claims two reports out to confirm this move to sub-400K -- we’ve got to get beyond the Christmas and New Year’s weeks to confirm the move.  If this becomes the new trend, then we’re on to something very good for the labor market – although not so good for corporate profits as those profits have been propelled by massive payroll slashing like never before.  (I’m not yet sure a new trend has actually occurred; I doubt we’ve suddenly made a big move from trending right at 422K to sub-400K when every improvement in the trend thus far has taken a very long time to materialize, but we’ll see.)

Continuing claims have improved mildly, which suggests we should see some easing in the long-term unemployment problem, which is easily in the worst situation since WWII.

Chicago PMI

Yow!  You’d think it was the mighty 1980s (4.2% GDP growth and a collapsing unemployment rate) as this was the last time the Chicago Purchasing Managers Index was this hot. 

Chicago PMI hit 68.6 for December (expected to come at just 61.0 – I say just as if 61.0 isn’t hot itself) after the 62.5 for November.  And all sub-indices were gangbusters.  New orders into the 70s at 73.6, a rare elevation; backlog hit 64.6 from contraction mode in November; inventories also rose to a hot 60 print after contraction in the prior month; and employment hitting 60 for only the ninth time in 30 years (or 2.5% of the time).  For new readers, a reading above 50 marks expansion. 

Unfortunately, price paid also soared, but remains below the levels hit in the summer of 2008 when oil was chillin’ at $145/barrel. 

One must assume that manufacturing employment raged in December, which means it will post a huge number via the next payroll report.  The segment (manufacturing payrolls) has contracted for four-straight reporting months, and if it doesn’t print a big number, we’ll know that these regional factory readings are about worthless as they signal something very big. 

And while we’re on the subject of these regionals as indicators, between these manufacturing readings and the strong retail sales of the past couple of months, one would expect a 4% GDP print for the final quarter of 2010, which is desperately needed as we’ve limped along at below trend rates.  And you know I’ve got to add, even if we did manage consecutive 4% readings for a full year, this recovery would still be the weakest coming out of deep recession for the postwar era.

And while we’re on the subject of GDP, it’s been too dependent on the inventory build, getting so little help from final demand – as measured by the real final sales numbers I’ve posted in this letter for four quarters.  The current quarter is going to see real final sales finally rebound to levels that are at least close to normal at this stage of the cycle.  But one quarter isn’t going to do it and even with help from nearly a half trillion dollars in government transfer payments, a rallying stock market and delayed foreclosures (allowing for a 16-month rent-free environment on average) we’ll still struggle to find strong final demand results.   That’s just the environment we’re in. 

Pending Home Sales

Pending home sales rose 3.5% in November (expected to come in at 0.8%) after the October’s 10.1% jump from near record low levels (that record low was put in during June – it’s a short history though as this measure only goes back to 2001).  This spells good news for official existing home sales for December and January, as those sales are counted when the contract closes. 

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Happy New Year!

Brent Vondera, Senior Analyst

Phone: 636-449-4900