U.S. stocks erased a morning-session rebound (from Wednesday’s losses) as prices weakened and moved into negative territory just after lunch, but a final hour rally returned the broad market to positive territory – although not all of the major indices closed higher.

The European debt situation held the headlines and another regional manufacturing survey slid to contraction mode.  You could feel these issues weighing on sentiment, which made that late-session rally all the more surprising.  It was probably a technical thing as the market bounced off the 200-day moving average of roughly 1258 on the S&P 500, some buying came as that level held.

The areas of safety continue to reign for now as utility and consumer staples outperformed.  Basic material, tech and consumer discretionary were the losing groups.

And the plot thickens.  Over the past two days Ireland has taken a more aggressive approach to its debt problems, just as Greece has intensified to a new level of chaos, as the Irish Finance Minister is demanding that bondholders share in the losses.  This was always inevitable, but stock analysts that have become conditioned to incessant bailouts didn’t seem to factor it in.  The bond market has priced it in, and is currently doing so to a greater extent.

This situation, bondholders taking losses, is very much opposed by the ECB (central bank) and the European Commission, as they know what it means for a banking system that’s continued to buy this junk – in fact incentivized to do so by the very ECB that has accepted this paper as collateral.  So, there will be a new round of intense discussions over the weekend and the ECB will throw its weight around.  They may yet delay the inevitable again, but the time will come when a technical default occurs (and watching this circus one notices that the with each delay, each so-called “fix,” the time with which concerns begin to rise again becomes shorter).

And now even the ECB has instructed EU banks to stress test (yes, another stress test) against Greek default.

Market Activity for June 16, 2011

Sector Activity for June 16, 2011

Jobless Claims

Initial jobless claims remained above the 400K mark for the 10^th straight week, but did improve to fall 16K to 414,000 (expected to fall to just 420K) from yet again upwardly revised number in the prior week.   It’s tough to see monthly job gains surpassing population growth (much less those that will re-enter the workforce) – combine these two and we need monthly payroll increases of at least 175K just to keep the unemployment rate at 9% -- while claims remain above 400K.

The four-week average was unchanged at 424,750.

Continuing Claims remained on a downward trajectory as both standard and emergency-level of claims declined.  The standard issue (covers first 26 weeks of joblessness) fell 21,000 to 3.675 million and emergency claims (that extend out to 99 weeks, and are supposed to expire end of 2011) fell 115,000 to 3.885 million.

So total continuing claims are now down to 7.6 million (was at 9 million six months ago), and they’ll come screaming down if they expire when scheduled to – if these people don’t have jobs by year end we’ll be slapped by a new level of reality, which is probably why they won’t expire.

Housing Starts

Housing starts (breaking ground on new residential construction) came in better than expected for May as they rose 3.5% to 560,000 at a seasonally-adjusted annual rate (SAAR), which follows an upwardly revised 541,000 in April (previously reported at 523K).   And permits rose 8.7% (expected to fall 1.1%), which suggests that June building starts will show another increase.

The vast majority of building starts came from multi-family units (such as apartments) as single-family construction has that distressed-property millstone around its neck.  The overall level of residential construction remains floored (chart below) and will remain at depressed levels for a long time still.

Philly Fed

The Philadelphia Federal Reserve Bank’s gauge of manufacturing activity within its region plunged 11.6 points in June to a reading of -7.7 in June -- the estimate was about as wrong as it could be as economists expected an increase to 7.0.  Cliff Reynolds commented: “Maybe they just forgot the minus sign.”

The future activity index (respondents’ expectations of things six months out) has tanked by 61 points over the past three months; it’s gone from 28 points above the 40-year average to 33 points below it.

The new orders index got slammed by 13 points as it fell to -7.6 (the lowest level since, well, last year at this time when we were dealing with that “soft patch”); unfilled orders dove 8.5 points to deeper contraction territory of -16.3; delivery times down to -20.5 from -2.3 (not much trouble keeping up with factories’ needs right now); and the average workweek fell to 1.9 from 3.9 (number of employees slid to 4.1 from 22.1 in May).

So Philly is now the second regional survey we’ve see for the month and both are in contraction mode.  What’s been the strongest aspect of this economy has rolled over and we’ll see if it is all about Japan or not by September/October; I think it seems too broad-based to be blamed solely on Japan, but time will offer us the answer.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900