U.S. stocks shook off weaker-than-expected durable goods orders number and yet another report on falling home prices to bounce Wednesday, although a late-session slide pared the gains.  Traders also looked beyond another sign that the global economy is in trouble as the latest UK business spending figure plunged 7.1% quarter-over-quarter.

Weak data doesn’t matter like it normally would though, as the market knows Bernanke isn’t going away.  The same so-called dissenters to current policy (Fischer at the Dallas Fed, Plosser at the Philly Fed, and to some extent Kocherlakota at the Minneapolis Fed) keep writing Op/Eds that the FOMC needs to tighten, but their words are vacuous as the votes to keep the current policy stance intact continue to be unanimous.  And the Committee goes through the motions of touching on their strategy to unwind, but they have no willingness or desire to unwind. 

Watch, there will be additional rounds of QE on any meaningful weakness in the stock market as Bernanke is petrified of a negative wealth effect (both stocks and home prices falling), because of the structural weaknesses in this economy – weaknesses that were brought on and exacerbated by the very Fed that kept policy too loose in the prior cycle, engendering a terrible debt problem and a housing bubble.  But we get to a point by which the policy must be reversed as it fosters new problems (specifically the mispricing of risk and higher commodity prices that crush the segment of the population that doesn’t have the resources to participate in the assets that Bernanke has driven higher), and that’s when we find that the underlying economic troubles have not been cured at all, just masked over. 

Energy, basic materials and industrials led the broad market higher.  Consumer staples and telecoms were the losers. 

So stocks bounced after three sessions of decline, but commodities outperformed (as the leading sectors would suggest) as all 19 components of the CRB Index increased in price – silver, sugar, copper, wheat, cattle and crude led the charge.

Yesterday’s 5-yr Treasury note auction was super strong as the bid-to-cover came in at 3.20 (3.2 times more demand than the amount being offered).  According to Bloomberg, this is the highest demand since 1994 – the yield on the 5-yr hit 7.8% in 1994, today it is 1.8%...ok.  

Market Activity for May 25, 2011

Sector Activity for May 25, 2011

Mortgage Apps

The Mortgage Bankers Association’s applications index rose 1.1% for the week ended May 20 after the previous week’s 7.8% increase that was solely driven by refinancing activity. 

In this latest week, purchases did contribute as apps to buy a home rose 1.5% after the prior week’s 3.2% decline.  Refinancing activity inched higher by 0.9% after two weeks of robust activity – apps to refi a mortgage jumped 13.2% and 9.0% in the prior two weeks, respectively.  The average contract interest rate on the 30-year fixed mortgage rose nine basis points to 4.69% last week. 

Durable Goods Orders

The Commerce Department reported that headline durable goods orders fell 3.6% for April (a 2.5% decline was expected), ex-transportation orders declined 1.5% (a 0.5% increase was expected) and non-defense capital goods ex-aircraft (the proxy for business spending) fell 2.6% (a 2.1% decline was expected.  So all of these results missed expectations, but they did follow big upward revisions to the prior month’s data – headline was up 4.4%. ex-trans up 2.5% and business spending up a strong 5.4%.  Nevertheless, the trend has been weakening for several months now. 

The ex-transportation figure is always an important number to focus on, but especially so for now as the Japanese quake/tsunami shut down a vital supply hub for the auto industry – transportation orders slid 9.5% in April and auto orders fell 4.5%.  With the ex-trans figure down 1.5% for April, it’s kind of tough to blame the decline on Japan – as so many people are doing.  In fact, beyond the Japan thing, ex-trans orders have been flat since November – up just 1.2% at an annual rate. 

And the other major aspect of the report to focus on is the non-defense capital goods reading as business spending is a key component of GDP, particularly since inventories aren’t helping to boost the growth number any longer.   This figure is flat since September – up just 1.0% at an annual rate.  On a year-over-year basis, this component is up 11% y/o/y, which is down from the 18% y/o/y rate in December and 25% y/o/y rate last June.  And based on the weakness over the past few months, y/o/y growth will be down to low single digits by June. 

So something is going on here and we’re seeing it in pathetically weak GDP readings as the economy has grown at a 2.3% real rate over the past 12 months even with wildly aggressive Fed policy and the latest fiscal stimulus (2% point reduction in the payroll tax and higher depreciation allowances for small businesses). 

FHFA House Price Index

The Federal Housing Finance Agency’s home price index fell 0.3% in March (a bit better than the -0.5% expected) and slid 2.49% for the quarter (worse than the -1.2% expected) due to big monthly declines for January and February.  The quarter-over-quarter decline was the worst since the fourth quarter of 2008. 

So this measure corroborates what the others housing market reports have illustrated – housing in double-dip mode. And we can only call it a double-dip because the home-buyers tax credit scheme artificially caused prices to rebound in 2009 and 2010; what we’re witnessing is that policy only delayed the inevitable, which in time we’ll see is the case for all asset prices. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900