U.S. stocks didn’t quite welcome the best jobless claims figure since job destruction began in late 2008, as the major indices spent most of the session in negative territory.  The broad market did manage a slight rally in the final minutes of trading that pushed the S&P 500 to positive territory, but the day was essentially a wash. 

So why the lack of euphoria?  Maybe it’s because the jobless claims news reminds traders that the Fed must eventually unwind its unprecedented level of monetary easing (although fat chance of that happening anytime soon); maybe it’s because traders believed the decline had more to do with the weather (if government employees don’t report to work they can’t file the claims); maybe it was yet another corporate announcement that higher commodity prices are eating into margins – this latest coming from PepsiCo. 

Energy, telecom and industrial shares led the broad market to its slight gain.  Technology, consumer staples and financials were the day’s losers.

Treasury yields began the day lower (those prices rose as stock-index futures were meaningfully negative in pre-market trading), but reversed to end the session higher and pretty much match very recent highs.  There are a lot of people talking about interest rates moving higher in a secular manner.  I’m not really buying it as this economy has become conditioned to ultra-low rates and many challenges remain.  And first rates have to break their April 2010 levels (the 10-year Treasury yield remains 33 basis points below that mark).  Then, even if yields do break out the economy – which means the housing market, household and government debt servicing and the stock market – would have to be able to withstand those higher rates.  I think that’s highly unlikely, which means any spike in rates will prove transitory.   In addition, we’re seeing that geopolitical risks remain heightened, which makes a durable increase in rates even more doubtful.  And speaking of geopolitics, that address by Muburak yesterday was super strange – and he doesn’t do himself any good by looking like Nosferatu.

But back to the topic, at some point rates will normalize but I can’t see how that occurs in the near future.

Yesterday Kevin Warsh announced he’d resign from the Federal Reserve Board of Governors effective March 31.  In my opinion, Warsh was one of the more responsible members of the FOMC (the governors have permanent status on the policymaking committee).  While he hadn’t actually dissented to QE measures, he’s written a couple of Op/Eds explaining that such “non-traditional” tools carry huge risks and that when the Fed must unwind, they’ll have to do so with “greater force” than in the past.  Therefore he was viewed as one of the future dissenters to current policy. 

Of course, we can’t know the true reason behind the resignation, but based upon past statements one expects he would rather not be around for the other side of this policy stance.  He’ll undoubtedly be followed by the addition of yet another dove (an advocate of keeping policy loose), which will carry meaningful consequences -- history has shown financial turmoil follows long periods of reckless monetary policy.  Pimco’s Tony Crescenzi recently commented that we may see a mutiny within the FOMC, meaning we’ll soon have three dissenters to current policy.  Well, that mutiny has now become much less likely as the potential opposing force has now been reduced to just two (Fischer and Plosser). 

Market Activity for February 10, 2011

Sector Activity for February 10, 2011

Jobless Claims

The Labor Department reported that initial jobless claims slid 36,000 to 383,000, the lowest level since July 2008 – the estimate was for 410,000.  

The four-week average fell 16,000 to 415,500.

Initial claims have been extremely volatile over the past six weeks, due to weather I suppose (when state-government employees don’t report to work they can’t file the claims).  Remember, we fell below the 400K for the first time since job destruction began in late 2008 as the figure printed 391K for the week ended December 24 (you can see this in the first chart above) only to see claims rise back above the 450K level by the week ended January 21.  

So we’ll see if this latest print indicates we’ve finally begun to trend within the 300K handle, which is very much needed, or it’s just another weather-related fake out.   Personally I’m yearning for big job creation, not just because it’s good for the country but because it will foster at least the very early stages of the monetary policy unwind – and markets can return to going from rigged by a money-pumping Fed to something that is more determined by fundamentals again. 

Continuing claims were mixed as the standard issue (those that cover the first 26 weeks of unemployment) fell 47,000 to 3.888 million, which marks the second month of decline.  Emergency claims (those that are rolled into when the standard period runs out and extend to as long as 99 weeks) rose 84,054 to 4.635 million. 

Foreclosures Filings

RealtyTrac Inc. reported that foreclosure filings (including each step of the process) fell 17% in January from year-ago levels to 261,333 U.S. properties.  The first step in the foreclosure process is the default notice, which is then followed by the auction, and then owned by the bank if the property fails to sell at auction. 

The process of foreclosure has been delayed for a couple of years now, as we’ve talked about at length.  Banks are simply managing the distressed properties they throw onto the market due to the very high level of foreclosures – they don’t want to flood the market as this would cause another plunge in prices and lead to even more foreclosures as more home-borrowers become underwater on their mortgage.  In addition, there have been various foreclosure moratoria demanded by the states, and then the latest delay that resulted from the robo-signing mess late last year. 

And this latest moratorium is what has sent foreclosure activity lower of late.  January marked the third-straight month in which filing came in below the 300,000 mark, ending a 20-month streak.  The fact that foreclosures have declined due to the delay of filings rather than mortgage cures/housing recovery is evident by the fact that bank repossessions jumped 23% month-over-month in non-judicial states (where foreclosures are processed without court intervention), while judicial states saw a 7% decline – delayed as courts determine whether or not the foreclosure process followed legal protocol. 

Bottom line:  Foreclosure filings will jump again over the next couple of quarters as we’ll probably see a couple of 400K-plus months followed by the return of another 300K/month streak. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900