U.S. stocks gained for a second-straight session, which makes it three up for the past four sessions, as the major indices followed international bourses higher.  The Dow Industrial Average outperformed the broad market as the 30-stock index was propelled by shares of Boeing and Caterpillar -- the two accounted for two-thirds of the Dow’s gain. 

Energy and basic material shares led the broad market higher.  Telecoms and financials were the day’s worst-performing sectors.  Telecoms have gotten hit by 6.4% over the past couple of weeks but the S&P 500 index that tracks these shares is still the best-performing sector since the mid-year correction that began in late April. 

The headlines were dominated by news of Steve Jobs taking another medical leave of absence as he provided no specifics on an expected return.  Steve Jobs shares, which were down about 10% in pre-market trading, came back to finish the session off by just 2%.  Still, Steve Jobs did weigh on the NASDAQ Composite as Steve Jobs, which trades under the ticker AAPL, currently accounts for 7.5% of that index. 

So domestic equities got a lift again from European bourses, which rallied after the latest ZEW Survey on economic expectations jumped nearly 10 points to a reading of 25.4 – that’s right in line with the 10-year average.  Considering the eurozone’s debt woes and the coming austerity actions (which will hit Western Europe hard as their economies have become heavily dependent upon the public sector over the past 30 years), this was a pretty amazing move.  Further, even though the ZEW reading on current conditions dipped 1.5 points to -6.1 that is above the 10-year average of -20.1. 

And while we’re talking about the international scene, the Shanghai Composite closed virtually flat Monday night and is down 13% since October (even with last night’s 1.8% pick up) to remain in bear-market territory (down 21% from its post-crisis high).  The Shanghai can’t seem to get going and the latest policy-tightening actions is probably what’s behind the poor performance.  There is more Chinese tightening coming in February and this is eventually going to weigh on U.S. manufacturing data.  Usually there’s a significant lag between the time of policy tightening and economic slowing, but China is talking about aggressively targeting an overheated real estate market and if they aren’t bluffing the effects will be felt more quickly. 

The Dollar Index fell back to the 78 handle before closing at 79.01.  The greenback’s latest round of weakness provides further evidence the November rally was more about euro weakness than economic growth expectations.  And when the greenback rallies again it will be on the next round of euro weakness.  At some point we’ll return to a more normal environment in which the USD rallies on growth expectations, but we’re not there yet.

The CRB Index inched to a new post-crisis high, led by the prices of cotton, wheat, hogs and silver.  The energy complex was mixed as heating oil gained ground, while the prices of crude and wholesale gasoline ticked down.  (Gasoline is holding its post-crisis high, currently at $2.49/gallon and crude at $92/barrel). 

Market Activity for January 18, 2011

Empire Manufacturing

The Federal Reserve Bank of New York’s survey of manufacturing activity rose to a reading of 11.92 in January (shy of the 12.50 expected), up from a downwardly revised 9.89 for December.  A reading above zero means that more respondents reported business activity grew.  This is a decent reading, but the measure’s average over the past six months of 6.50 is weak for a recovery phase – it should be running around 15. 

The internals of the report were mixed.  New orders jumped more than 10 points to 12.39 from 2.03 in December – quite a rebound off of that large contractionary reading of -23.80 in November.  The employment figures bounced nicely as the number of employees rallied from contraction, up 12 points to 8.42 and the average workweek returned to expansion mode after two months of negative prints, rising to 2.11 in January.  However, for a sector that is supposed to be so hot, the average workweek readings remain well below expansionary levels. 

The big problems reside in the backlog of orders and price components.  Unfilled orders were up 6.6 points but remained in contraction mode for the 10^th straight month, coming at -11.58 for the month -- the unfilled orders reading is key as it means production cannot withstand a two-three month slowing in new orders.  The prices paid component rose more than seven points to 35.79.

The differential between prices paid and prices received has eased, which will take pressure off of profit margins within the region, as the price received measure showed a 12-point rally to 15.79.  The latest trend is that factories within the Federal Reserve’s second district have begun passing costs down stream. 

Bottom line:  Empire is the first regional factory report we receive for a given month, so it kicks January off on a decent note.  However, continued policy tightening in Asia is likely to adversely affect export orders and if a slower inventory cycle persists then two of the main engines behind the revival in factory activity will wane.  So those aspects of economic activity are key to watch.   And if new orders weaken, production will decline summarily as there’s no backlog to support activity. 

I’ve expected factory activity to cool since October; instead it carries on.  Still, the lack of manufacturing job growth (up just 128K since January 2010 after shedding 2.1 million positions in the 24 months that ended December 2009) shows the outlook among business managers remains fragile. 

NAHB Housing Market Index

The National Association of Home Builders’ index on housing activity held at the deeply low level of 16 for January (expected to tick up to 17), as the single-family sales and prospective buyers traffic measures remain floored.   To put this in perspective, a reading below 50 means that more respondents expressed negative views on home sales. 

Beyond weak sales figures, foreclosure activity remains a big threat to home builders as new home sales must compete with those of existing homes.  And as foreclosure activity has been delayed yet again (this time due to the “robo-signing” mess), we’ll see the amount of distressed properties hitting the market accelerate over the next two quarters. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900