U.S. stocks climbed for a second-straight session on Wednesday, following strong moves among most overseas bourses the night before.  European officials seem ready to step up efforts to stem their debt crisis and that’s what traders were looking for.  As we mentioned yesterday morning, the ECB stepped in to pad the bidding in Portuguese debt auctions.  Also, consensus among EU members appears to be improving with regard to boosting the bailout fund. 

That’s all it really takes these days as the market mindset appears to be intensely short-sighted – traders know that the continued need for bailouts spells trouble ahead.  Just look at how stocks have reacted since Bernanke’s Jackson Hole speech on August 27.  This is something I’ve talked about many times now but it’s worth repeating.  That speech was the initial signal that the second round of QE was coming.  Prior to those comments, stocks were in correction phase (down 16% from what was then a 19-month high hit on April 23) and showed little ability to rally. Sure many economic data points have improved of late, but most of it has been due to increased consumer spending that been sparked by the latest rally in stocks. 

Financials and energy led the broad market higher.  Consumer discretionary, telecom and health-care shares were the laggards.   All 10 major industry did gain ground. 

Crude prices extended the latest rally to three sessions yesterday, moving back toward that $92/barrel mark to close at $91.81.  The latest energy report showed crude inventories fell more than expected.  However, gasoline stockpiles rose much more than expected -- demand slipped on both the week and a four-week average bases (and up just 0.9% from the year-ago period).  And demand for distillates (heating oil and diesel) also declined last week – one suspects this resulted from lower diesel demand as heating-oil consumption had to have been up due to weather conditions.  So the report was hardly bullish, but with all of this money sloshing around plenty of it’s going to find its way to the energy complex – and the Fed says their actions aren’t driving commodity prices higher.  The price of oil was down 10% for the year as of August 27, but has since rallied 23% since. 

And the CRB Index jumped to a new post-crisis high, propelled by the prices of soybeans, corn, cattle, copper and wheat.  We’re finding out the idea to subsidize a feedstuff such as corn for energy use wasn’t all that brilliant; no wonder live cattle prices have hit a record and corn is closing in on its all-time high.  

Market Activity for January 12, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose for a second-straight week, driven by refinancing activity as borrowers appear to believe that a sub-4.50% 30-year rate is history.  That average contract rate on the 30-year fixed mortgage slipped last week to 4.78% from 4.82% in the prior week.

Unfortunately, apps to purchase a home fell again (down four of the past five week and off by 10.5% y/o/y). 

Import Prices

Import prices rose 1.1% in December (expected at 1.2%) and were up 4.8% on a year-over-year basis (expected to gain 4.7%).  These are not problem levels in and of themselves, but the trend of the past three months is disturbing. 

Over these past three months the import price index has gained 15.7% at an annualized rate.  So while the current y/o/y results are not a problem, the latest trend is very much so.  Ultimately, the trend in import prices depends on the direction of the U.S. dollar.  Certainly Fed policy will continue to pressure the greenback, but over the intermediate term the dollar may hold up as the European debt issue weighs on the euro. 

Beige Book

The Fed’s latest assessment of economic conditions within each of its 12 districts, known as the Beige Book, illustrated that holiday-season spending and manufacturing activity drove economic expansion during the six weeks ended January 3.  Financial services and real estate weighed on activity.  The Fed characterized the overall improvement over the latest six weeks as “moderate.” 

Consumer spending appeared to be higher in all districts relative to the 2009 holiday season and most retailers reported sales growth consistent with or ahead of expectations.  Still, consumers relied heavily on promotions and discounting with the exception of Philly and San Fran where they relied less on discounts, according to the report.   Tourism was characterized as positive or improved in most districts and brisk in New York. 

Manufacturing activity “continued to recover across all districts” but the improvement wasn’t uniform.  Richmond, Chicago and St. Louis reported “strong flow of new orders.”   Boston, Atlanta and Dallas noted that factory activity was held back by the construction sector. 

Real estate was slow across all districts.  A majority stated housing markets were “weak and sluggish.”  KC reported further weakening and St. Louis saw additional declines in existing home sales, but permits rose for new-home construction (that makes a lot of sense).  Most districts though state “high levels of existing-home inventories dampened new-home construction.”  Philly, Atlanta and Chicago cited difficulty in obtaining credit as another constraint. 

Commercial real estate remains weak with vacancy rates high. 

Loan activity was mixed as it improved in Philly and Richmond, was stable in San Fran, an mixed in New York (consumer loans declined, commercial increased).  Demand for commercial and industrial loans was flat overall.

Most districts mentioned an increasing prevalence of cost pressures but only modest pass-through capability into final prices (something we’ve talked about for some time now as a challenge to profit margins).  Many districts reported concerns that already increasing petroleum-related costs will continue to rise in 2011.

Labor markets had firmed in total but New York, Minneapolis and St. Louis reported job cuts.  There were several instances in which firms stated they would increase work hours rather than hiring more workers. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900