U.S. stocks took a bit of a breather following Tuesday’s rally.  The major indices ended mixed as the S&P 500 and NASDAQ Composite closed slightly lower, while the Dow ended fractionally higher thanks to the shares of Caterpillar, Boeing and Disney.

Among the 10 major industry groups, tech was the lone advancer.  Energy closed slightly lower, but did outperform the broad market.  Financials, utilities and telecoms were the hardest hit.

The Dollar Index (DXY) gained a little ground, marking just the fourth positive session out of the last 18.  But the gain was paltry and the index remains deep in the 77 handle, closing Wednesday at 77.16.  Of course, there are a lot of people that like this dollar debasement, down from 120 on the DXY in 2002, and more importantly when it first broke the 90 handle in 2004.  Sure, it helps exports to an extent, but it also puts a lid on living standards here at home as purchasing power is diminished over time via higher commodity prices – and import activity still overwhelms exports as the price of oil rises with a tumbling greenback.  While the very strong U.S. dollar of a decade ago was not optimal, the current level carries huge consequences that too many people ignore while they myopically seek to boost export activity.  In my opinion the sweet spot is a range of 85-90 on DXY. 

The CRB Index made a new post-crisis high, and within 3% of the pre-Lehman collapse – a collapse that crushed the index by 40% in a matter of two months.  The gain was propelled by the prices of sugar (broke out to a three-decade high), wheat, nickel and cotton (the prices of wheat and cotton are closing on their highs hit during the commodity price-spike in the summer of 2008). 

Market Activity for February 2, 2011

Sector Activity for February 2, 2011

All Things Aren’t Equal…They Never Are

The Energy Department’s weekly report showed a larger-than-expected build in crude stockpiles; inventories rose 2.59 million barrels vs. the 2.50 expected.  That’s not a huge miss, but considering stockpiles remain roughly 10% above the five-year average, all things being equal (or ceteris paribus for you academic-leaning Latin-language sticklers), it’s a bit puzzling why oil prices didn’t sell off to some degree yesterday.

But things aren’t equal, there are always a plethora of variables that affect market prices.  The main elements for now are a QE-crazed Fed and increased political tensions in the Mideast.  The former is really behind $90-plus/barrel oil, and if the latter spirals into further chaos then the security premium really gets rolling and we’ll be looking at $100-plus.  Take away a QE-centric Fed and we’re probably looking at $70/barrel oil, that’s with a security premium – but of course that means a lower stock market and thus lower personal consumption and less energy demand. 

Mortgage Apps        

The Mortgage Bankers Association reported that their mortgage applications index rebounded last week by 11.3% after the 12.9% slide in the previous week.  Finally, for the first time since the week of November 5 both refinancing and purchase apps rose.

Refi applications jumped 11.7% (although it follows the 15.3% slide in the prior week).  Apps to purchase a home rose 9.5%, following four-straight weeks of decline. 

The average contract rate on the 30-year fixed mortgage basically held steady, up just a tick to 4.81%. 

ADP Employment

The latest employment survey from payroll-outsourcing firm Automatic Data Processing estimated that private-sector payrolls rose 187,000 in January (besting the 143K expected).  This followed a downward revision to the December reading, down 50K to 247,000.

The report estimated that manufacturing payrolls rose 19,000 last month.  If accurate, this would be nice as official payrolls within the sector are down 2,000 over the past six months.  ADP has them up 54K.    

Construction employment fell just 1,000, but this marks a 47^th-straight month of decline that has payrolls within the sector down 2.311 million.

Large firms (> 500 employees) increased payrolls by 11,000; medium firms by 79K; and small firms (< 50 employees) added 97K jobs – that’s the largest increase from small business since the 166K increase in July 2006, but the overall number is still less than 1% above the cycle low hit in February 2010. 

It’s entertaining to see what ADP comes out with, but in terms of an accurate prediction to what we’ll get via the official data (which follows ADP by two days – estimates are for a 140K increase) the report is not very worthwhile.  What it does do well is signal directional changes within the labor market – turns from contraction to expansion and vice verse. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900