U.S. stocks sold off, making it two up and two down for the week, but the major indices held in there quite well considering it’s likely the worries over the European debt situation are setting up to roll again.  Expectations that today’s jobs report will show the largest increase in private-sector payrolls we’ve seen for this cycle yet helped to buoy stocks.  The official estimate is for just 175K in private payroll growth but the whisper number has been worked up to 200K-plus. 

Telecoms (hit by 3.1%), energy, and consumer discretionary shares weighed most heavily on the broad market.  Tech and health-care shares were the only of the 10 major industry groups to trade higher. 

Treasurys (yes, that’s the correct spelling) rebounded yesterday, pushing yields back down and erasing about half of Wednesday’s increase in rates.  The yields closed at: 0.68% for the 2-yr, 2.08% for the 5-yr and 3.41% for the 10-yr.  (For perspective, the long-term averages are 6.38%, 6.85% and 7.18%, respectively.)  Today’s POMO (outright Fed purchases) was good for $6.8 billion, making it $23 billion for the week thus far; we’ll get another $8 billion in Fed purchases today. 

The CRB Index has taken a breather of late, as this measure of commodity prices had jumped 27% in the four months that followed Bernanke’s August 27 speech that all but signaled the second round of QE was coming.  To be sure, most of the rise in commodity prices over the past 20 months or so was simply a rebound off of the cycle low when the financial crisis hit its crescendo.  But this latest leg up has had something more substantial to it (which is why we’ve been touching on it each day) – the early stages of real future inflationary fears coupled with bad weather events in Russia, Australia and Florida.  The CRB was pushed lower yesterday by the prices of sugar, crude (back below $90), copper and nickel.  But a number of index components continue to run -- OJ, cotton and cattle are all close to their record highs.

The Dollar Index (DXY) is back on the rise (up four days in a row), and you can’t confidently say it’s because of the improved economic data or the above mentioned yields wouldn’t remain so low, even with the Fed in play.  More likely it’s the latest round of euro weakness that’s driving the DXY higher.  The EU has now proposed that regulators be granted powers to write down banking-industry senior debt as the EU’s Financial Services commissioner acknowledged that “banks will fail in the future.”  (And I suspect he may be talking about a sooner timeline than that statement may otherwise imply during a more normal environment.)  He knows they own a whole lot of junk and must be able to restructure debt as government cannot backstop deep financial problems to infinity. 

Market Activity for January 6, 2011

Jobless Claims

The Labor Department reported that initial jobless claims bounced back above the 400K level, up 18,000 to 409K for the week ended New Year’s Eve – in line with the expectations of 408K.  The prior week, which ended on Christmas Eve, was revised up by 3K to 391,000.  I emphasize that the past two weeks ended on holidays because the Labor Department can have trouble adjusting for these year-end holidays, and the way in which claims have remained much higher than usual probably makes adjusting for seasonal factors even more difficult. 

The four-week average fell 3,500 to 410,750.  That’s the lowest level since July 2008, but don’t continued improvement must be confirmed in the following weeks.  If claims couldn’t hold the prior week’s level even with the back-to-back holiday weeks, then there’s a high probability initial claims will bounce back to the trend of 422K that was in place a couple of weeks back, especially since we’ll have end of holiday retail layoffs coming.

Continuing claims fell again on balance. The standard issue (those that cover the first 26 weeks) fell 47,000 from an upwardly revised 4.103 million in the prior week and emergency level of claims (those that can extend out to 99 weeks) fell 23,320 to 4.507 million. 

ICSC Same-Store Sales

The International Council of Shopping Centers (ICSC) reported that same-store retail sales (which tracks y/o/y sales growth) came in at 3.1%, below the 4.0% increase expected.  The November reading was revised down to 5.4% from the previously reported 5.8% increase.

One can blame the lower reading on the blizzard that hit the East Coast in the final week of December, but you’d think the estimate would have had the weather event factored in – then expectations have gotten ahead of reality so I guess the higher estimate shouldn’t surprise anyone.  And the weather didn’t hold back the luxury segment, which saw sales jump 8.1% from the year-ago period.   The affluent consumer always drives things, they account for 40-50% of total retail sales, but for this cycle luxury has really helped out – a function of the stock market’s bounce. 

We’ll get the December jobs report this morning.  The official estimate isn’t much to write home about, expecting 150K in total payroll growth and 175K in private-sector payrolls.  But the Street’s whisper number is surely above 200K, with plenty of people expecting that first 300K increase in private payrolls to finally materialize.   

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900