U.S. stocks bounced between gain and loss yesterday, but while an afternoon rally fizzled in the final hour the major indices managed to close in positive territory.  The market was helped by another pretty strong employment report from ADP (which we discuss below), but was pressured by advancing oil and gasoline prices – closing at $102.40/barrel oil and $3.03/gallon gasoline; AAA has the national retail average at $3.42 this morning. 

Even with regard to the solid preliminary jobs report (we get the official number for February tomorrow), I’m not sure traders are really hoping for a big-bang number as it will put pressure on the Fed to halt QE when round two expires on June 30.  This probably offset comments from Fed Chairman Bernanke that certainly hinted at more asset purchases beyond June, which seemed to give stocks a brief boost around midday (we expand on this below also). 

Energy, tech and industrial shares led the broad market higher.  Financials and consumer staples were the day’s losers. 

The dollar took an additional beating as the Dollar Index moved solidly down into the 76 handle to close at 76.66.  We’ve moved too close to that 75 handle that I see as the start of the danger zone – a level that will drive import prices even higher, further drive up demand for Treasury purchases (a harsh reality when the Fed, which accounts for 70% of demand, stops buying government debt) and probably bring the threat of currency wars back to the table.  The only thing that will block currency-related acrimony is that Asian and certain Latin American economies have a real inflation problem on their hands and may seek to deal with that situation rather than devalue their own currencies (a race to the bottom scenario) for fear that it exacerbates those very inflationary pressures – but the possibility of aggressive tightening within emerging market is hardly a peach of a story either. 

Market Activity for March 2, 2011

Sector Activity for March 2, 2011

Mortgage Apps

The Mortgage Bankers Association reported that its applications index fell 6.5% last week as both purchase and refi apps declined despite a drop in mortgage rates. 

The average contract interest rate on the 30-year mortgage fell 16 basis points to 4.84% last week.  Nevertheless, refinancing activity declined 6.5% and purchases apps remain mired, falling 6.1% for the week.  Apps to purchase a home are down 18% over the past 12 weeks and are just 6% above the 13 ½ year low hit touched in July.

We’re finding the very low interest-rate environment really doesn’t matter that much.  Absent substantial job growth (300K-plus/ month for at least a year), the housing market will remain stuck in the mud as it is going to take a very long time still to absorb supply.  

ADP Employment

Automatic Data Processing’s latest employment survey estimated that 217,000 payrolls were added in February (expected to come in at 170K).  This marks the third month of pretty significant gain as their reading for January was +189K and +247K for December. 

Now, the official data has yet to show this growth in jobs as payrolls rose only 83K/month on average over the past three months, according to the government.  I want to believe that this ADP number is more accurate than the government at estimating things, but we’ll see.  We may very well see a nice revision higher to the January number and a 250K print for February when the figures are released tomorrow (the market expects an increase of 200K in private-sector payrolls for February). 

ADP estimated that large firms (> 500 employees) added 13,000 payrolls, medium firms boosted jobs by 104,000 and small firms (< 50 employees) by 100,000. 

They estimate that manufacturing added 20,000 positions, but construction continued to shed jobs, down 9,000 in February.

In a separate report, outplacement firm Challenger, Gray & Christmas reported that announced layoff rose for a second-straight month in February.  Planned job cuts rose 32% to the highest level since March 2010.  The firm stated that rising energy costs may be forcing employers to postpone hiring plans.  This is s topic we’ve talked about for some time now as it seems likely to me that the Fed’s money-printing scheme may actually work against economic improvement over time. 

More QE Hints

In addition to recent comments from Fed officials Yellen and Bullard that tacitly signaled more QE to come, Fed Chairman Bernanke gave rise to the subject yesterday.  In testimony before Congress he stated that a third round of asset purchases has to be dependent upon the central bank’s dual mandate for stable prices and maximum employment.  Since Bernanke continues to shrug off surging commodity prices by stating that the resultant consumer-level inflation is likely to be a temporary problem, then we’re left with the employment mandate.  Since the unemployment rate will obviously remain at very high levels by the time the current QE program expires on June 30, one has to take this as another hint we’ll get more market-manipulating money printing.  

And on this idea that inflation will prove temporary…well, of course it will.  Here are the two scenarios: 

  1. Inflation will jump to troubling levels, the Fed will then be forced to react and this economy that’s become conditioned to stupidly-low rates will contract

  2. The economy will contract on its own as already weak levels of demand will destruct due to higher input costs. 

Recall Bernanke’s statement in that last 60 minutes interview that he is 100% certain he’ll be able to stomp out a pernicious bout of inflation.  What he doesn’t tell the unsuspecting public is that another deep recession will result from these actions. 

Disingenuous statements by Fed Chairmen have become a trend over the past several years and it shows an incredible degree of audacity .But since the Fed escaped virtually unscathed from paying the price for monetarily carpet-bombing the housing market, it’s no wonder the Fed Chairman believes he can say anything no matter how ridiculous and everyone will believe it. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900