U.S. stocks took their hardest beating since August and the Treasury market rallied huge (particularly the long end – short-end can’t rally much at near-zero yields) as equity traders could no longer ignore weak data and bond traders rush to get in for quick profits in anticipation of another round of Fed buying.   The 10-year yield has gone sub-3.00% again (see chart).  Due to that expectation that the Fed will continue to backstop financial markets (for as long as they can at least), stocks held up better than probably would have otherwise be the case with the economy in the shape it’s in.

And it wasn’t just weak domestic data, several days now of missing expectations by wide margins, but the market also had to deal with emerging-economy activity slowing too. 

That is, China and India posted weaker manufacturing results -- the slowest pace in nine months for China and the slowest in four months in India.  Indian factory activity continues to roll at a pretty good pace, but 8% y/o/y inflation and the now nine interest-rate increases that seek to combat those rising prices will likely cause that country’s activity to slow to stall speed over the next several months. 

The CRB Index declined, but the move wasn’t as deep as one would think based on the strong positive correlation between stocks and commodities right here.  The index was buoyed by the prices of nickel, aluminum, corn and cotton.  The energy complex took its hit, but crude held above the $100/bbl mark. 

Market Activity for June 1, 2011

Sector Activity for June 1, 2011

 Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell for the week ended May 27 as refinancing activity declined and the index received no help from the purchase side. 

The overall index fell 4.0% last week, pushed lower by a 5.7% decline in refinancing apps. The average contract interest rate on the 30-year mortgage fell 11 basis points to 4.58%; the 15-year fixed mortgage held at 3.78%.  Those rates will come out even lower next week so we should see refi activity bounce.  Purchases were flat after the 1.5% increase in the previous week. 

So we look at the purchase index and see that activity did bounce in early May after sliding 13% in late April as the FHA insurance premium was increased.  This should provide some boost to June existing home sales, but the move appears slight as purchases slipped again in mid-May and have flat-lined over the past two weeks. 

ADP Employment

The preliminary employment report from business outsourcing firm ADP disappointed big time as the report printed an increase of 38,000 jobs for May, the number was expected to come in at 175,000.  The April number was revised down slightly to +177k from the previously reported +179K.  The May result is the first double-digit number since October and the weakest reading since September.

The report estimated that service-providing sectors added 48,000 positions after the 141K pickup in April – the three-month average was +163K/month and this reading brings it down to +118K.  Goods-producing sectors shed 10,000 as manufacturing payrolls decline 9,000 (likely driven by auto-plant shutdowns due to Japan) and construction cut another 8,000.  ADP doesn’t release mining payrolls, but it must have risen if total goods-producing fell just 10K as factory plus construction cut 17K.  The three-month average for manufacturing jobs growth was 31K/month, this brings it down to +21K. 

So some of this decline can be blamed on Japanese supply chain issues, but that only covers the manufacturing sector – besides, it’s not only Japan but increased costs appear to be the main problem.  Nevertheless, assume it’s all Japan related.  When you adjust for the factory disruption it still leaves the May payroll increase 127,000 shy of the estimate – an estimate that was already much too weak to drive the unemployment rate lower (at least 125K/month needed just to keep up with population growth). 

ISM Manufacturing

The Institute for Supply Management’s nationwide manufacturing gauge slid seven points to 53.5 in May after spending four straight months above 60 – the expectation was for the number to slip just three points to 57.1.    Now, a reading above 50 still represents expansion mode, but the degree of decline is a problem. Over the next several months, we’ll see how much of this is due to the Japanese disruption. 

I’ll say this, there’s not much room for error as many firms saw both new orders and backlog of orders slide to numbers that are very close to contraction – both number fell 11 points to 51.0 and 50.5, respectively.  Production has outpaced new orders for three months now so I suspect backlog is going to print contraction in June. 

ISM’s employment index continues to hold up, down five points but remains near 60 at 58.2.  However, this is a lagging number, so we’ll see if it remains above 50 over the next couple of months.   Export orders, which along with autos have really fueled the manufacturing boom, fell seven points to 55.0 – it had averaged 60.6 year-to-date before this number.  The prices paid measure slid nine points but remained at the elevated level of 76.5 – and the section of the report that tracks what respondents said included comments of pricing pressures within every response. 

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Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900