U.S. stocks began yesterday’s session higher but lost momentum after the latest survey on manufacturing activity was released to show it had moved to contraction mode.  The news kept any alacrity to get the risk trade rolling at bay and the major indices went negative as the session progressed.

Energy, basic materials and telecoms were the only industry groups to close higher.  Industrials, consumer discretionary and tech shares led the losers. 

The Dollar Index weakened slightly after two days of gain (and up 4% since the end of April 29) and the CRB Index bounced back a bit (it’s down 8% over the same period), driven by silver, sugar, OJ and the energy complex. 

Concerns over European debt issues seemed to ease yesterday -- or were they ignored? -- but that doesn’t mean that things look better.  Interest rate spreads for the PIGs continued to new wides.  Borrowing costs for Spain narrowed ever so slightly, but we’ll see how things go as the new regional governments report that the country’s debt situation is even worse than previously believed.   And for an economy that arguably has a larger housing-market overhang than our own and 21.3% unemployment (reportedly over 40% for the younger end of the workforce), Spain is probably going to crack in the not too distant future. 

Is Spain the breaking point for the euro-zone?  It’s too tough for me to even guess.  It could be Spain; it could be a Greece that must leave the zone in order to bring back the drachma just to devalue it and make paying their debts a bit easier; it could be an Italy that has frontloaded its government debt to the extreme and thus must roll 70% of it within 18 months. 

Market Activity for May 24, 2011

Sector Activity for May 24, 2011

New Home Sales

The Commerce Department reported that new home sales rose 7.3% in April to 323,000 units at a seasonally adjusted annual rate (SAAR) – this beat expectations, which forecast sales would remain unchanged at 300K.   On an unadjusted basis, 32,000 new homes were sold last month, which is the record low for April. 

That seasonally-adjusted number marks the second month of increase after matching the all-time low of 278K in February (a low first hit in August).

The number of new homes available for sale fell to a new all-time low of 175,000 units and the inventory/sales measure also improved to 6.5 months worth from 7.2 months in March.   That’s very near the long-term average, which is 6.2 months worth. 

The median price of a new home rose 1.6% in April to $217,900 and is up 4.6% over the past 12 months. 

So new-home buying activity improved just a bit in April and the supply figures sit at reasonable levels (the absolute number of new homes for sale is at an extreme low relative to population, but relative to weak sales activity the figure is just average). 

However, the problem with housing is one of massive supply from the distressed property segment within the existing-home arena.  In addition, builders must also deal with higher building material costs.  As a result, conditions make it very difficult for new homes to compete; it’s going to be a while before profitability returns to this market and new home construction picks up to meaningful levels. 

Richmond Fed

The Richmond Fed survey joined the other two regional factory surveys for the month of May to show that what has been the strongest segment of the economy is slowing.  And factory activity within the fifth Federal Reserve District did more than just slow, but moved to contraction mode. 

The new orders component slid 25 points to -15, the deepest level of contraction since the financial crisis was still brewing in the spring of 2009; same for the orders backlog reading as it was down 18 points to -19, also the worst since the financial crisis.  The number of employees held up at a reading of 14, but the average workweek slid to 0 from the 7 print in April and the wages reading plunged 16 points to a reading of 6.    

Bottom line: 

April industrial production and now all three regional reports thus far released for May show that a dramatic shift has occurred in the manufacturing sector.  Some of this is due to supply chain issues as the Japanese quake/tsunami shut down a vital supply link.  However, the Richmond Fed’s district is not auto-industry intensive (which is what the Japanese shut down affected most) and some of this has to be due to slower economic activity within the Asian region altogether. 

There have been two previous occasions over the past 16 months in which Richmond dipped to negative territory (circled in red in above chart) only to follow with strong rebounds.  But the internals of the survey were not nearly as weak as they are at present. 

Economic growth is losing altitude even as we weren’t flying that high to begin with. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900