U.S. stocks looked to shake off early-session weakness by bouncing about an hour into official trading, but succumbed to pressure from the European debt situation in the afternoon – or so it goes if one must come up with a story.  The funny thing about this storyline is that mid-morning the news services cited an easing of European debt concerns as stocks exhibited that short-lived bounce.

Of course, we also have our own public-sector debt problems as it was reported that the U.S. breached the federal debt limit yesterday and Treasury had to use some out-of-this-pocket-and-into-that-one maneuvers.  But so long as Europe’s situation appears worse then our troubles get deflected for a while. 

The safe-haven plays remained the leaders on Monday as health-care and utility sectors were the only groups to gain ground.   Consumer staples also outperformed, but did lose ground. 

Along this safe-haven scenario, the Treasury market rallied as the yield on the 10-year declined to 3.15%.  The bond market is on the cusp of pricing in another round of trouble – much like occurred last spring/summer.   So while most people talk of the coming quantitative tightening (QT), the bond market may very well be predicting another round of QE in the not too distant future.  (To clarify, QT is not actual monetary tightening, which would be a shrinking of the balance sheet – the Fed selling bonds back into the market -- and hiking fed funds.  It is merely the cessation of large-scale asset purchases. 

Market Activity for May 16, 2011

Sector Activity for May 16, 2011

Commodities

The price of crude continued to slide yesterday, down $2.30 to $97/bbl.  So here we are roughly at levels prior to the MENA tensions exploding in February (actually still $5 above pre-MENA), yet the region remains the hotbed with new fighting between Christians and Muslims in Libya, Iran instigating Shiites in Bahrain and trouble brewing again around Israel.   The price of gasoline got slammed by another 14 cents, sending wholesale to $2.93/gallon, and if this level holds then relief at the pump will materialize – this level on wholesale is commensurate with a $3.60 price at the pump.  Another round of QE will blow this thought out of the water though. 

The metals complex also moved lower (both precious and industrial metals), but agricultural commodities rallied again – corn, cotton, sugar and wheat prices rose.

Smack!

I see another economic organization has felt reality’s face slap.  The National Association of Business Economists (NABE) announced that they’ve lowered their 2011 economic growth forecast to 2.8%, down from the 3.3% rate they estimated three months ago.  So they’re getting closer, next stop is 2.0%. 

It’s tough to see 2011 GDP coming in above that level, in fact we may be fortunate to get a 2% handle.  Our own view at the end of last year was that GDP this year would come in at 2.5% rate, largely due to a 3.5% growth expectation in the first half as the latest round of fiscal stimulus (the payroll tax rate reduction and higher depreciation allowance for small business) front loaded activity.  However, by February is was pretty obvious we weren’t getting 3.5% first-half growth, and now that we know Q1 came in under 2.0%.  We should consider ourselves fortunate to escape a 1.0% handle for all 2011.  The NABE also revised their outlook for home prices as they now see them falling rather than rising.   Not exactly cutting edge analysis as the data has shown since February that the market is in full-blown double dip mode.

Empire Manufacturing

The first regional factory activity gauge for May didn’t get the month started off on a strong note, instead the figure continues the weaker trend that began in April. 

The Empire Manufacturing index fell 10 points to a reading of 11.88 (expected to come in at 19.55).  This is not a bad reading, and the internals of the report (most of them anyway) held up well, but what we’re seeing is that what’s been the strongest segment of the economy is decelerating. 

New orders and shipments were really the only sub-indices to show meaningful decline, but even these held at pretty good levels.  Both of the employment figures within the report improved (number of employees and average workweek) with the average workweek rising to one of the highest readings on record – I’m afraid that these are the lagging aspects of the report and will too show deceleration in the months ahead.  The inventory reading surged, suggesting that production got ahead of shipments in May. 

The number that stuck out the most was the 12-point pop in the prices paid number, hitting the second-highest level in this readings decade-long history.  According to the NY Fed Bank, respondents to the survey estimated that the prices they paid rose 8.1% on average over the past year.  The prices received rose just one point, so the compression of profit margins continues. 

NAHB Housing Market Index

The National Association of Home Builders index of confidence held at a reading of 16 for May (expected to inch up to 17).  The gauge is meant to measure confidence among homebuilders, which is anything but as a number below 50 means that the majority of respondents see conditions as “poor.” 

So the measure has been stuck below a reading of 18 for a year, and the only reason it jumped to 22 in May 2010 was because the home sales fostered by last year’s tax credit offered unjustified optimism – well, optimism is surely the wrong term but everything’s relative. 

It’s going to be a while before home builders get a sense that the market has normalized.  A glut of existing-home supply (a glut that just keeps coming as foreclosures add distressed properties to the market) is making it the most difficult environment for the new-home market in a very long time.  This confidence measure only goes back to 1985, but I doubt it’s a stretch to believe that’s it’s the worst time for the home-building market since the 1930s. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!