U.S. stocks rallied again yesterday to end the second quarter with a bang as the broad market jumped 4% in the final week – too bad we can’t say the same thing for the economy as the numbers are working out to print another sub-2.0% GDP reading.  This late-quarter move was nearly enough to erase the weakness that set in beginning in May.  For the quarter, the S&P 500 was down just fractionally; at its worst the index was off by 4.5%.  Overall, the broad market was 7.2% below the April 29 multi-year high hit; currently it is just 3.2% below that mark.

(And on that 2% GDP comment, it may just be what stocks want right now as it means the Fed’s liquidity circus remains in play.  But while this benefits the affluent, large segments of the population is getting stomped as growth is much too weak to spur the level of job growth the overall economy needs.  The irony is indeed thick considering the class warfare rhetoric that’s being thrown around.  It also sets the stage for serious societal tensions.)

The cyclicals led yesterday’s rally as industrials, energy, tech and basic materials outperformed.  Utilities, health care, financials and consumer staples were the laggards. Although the areas of safety ruled for the quarter as health care, utilities and consumer staples were the best performing sectors during the three months ended yesterday.

And as goes stocks so go oil and gasoline.  Crude closed back above $95/bbl (had fallen to $90 as of Monday) and wholesale gasoline up another two cents to $3.03/gal. (was down to $2.77 a few days back).   The national average at the pump is $3.55.

Treasury securities got smoked again yesterday, for the 10-year the yield is up 30 basis points in four sessions.  However, we’ve got to keep in mind that they’ve sold off from seriously hot levels as that 10-year yield hit 2.86% on April 24.   Most of this is due to the risk trade coming back on and stocks rallying.  But the last time stocks had risen to current levels (1320 on the S&P 500 hit on April 15), the 10-year yield closed at 3.41% -- today it’s 3.16%.  Thus, yields don’t only remain at obscenely low levels, but they are still much lower than the last time stocks rallied to current price levels.

Market Activity for June 30, 2011

Sector Activity for June 30, 2011

Jobless Claims

So the Labor Department reported that initial jobless claims remained above the elevated 400K mark (elevated for this point in the cycle) for a 12^th straight week.  Those claims fell just 1,000 to 428,000 – above 420K for eight of these 12 weeks.  The four-week average edged higher to 426,750 from the 426,250 in the previous week.

Continuing claims did fall after rising in the previous week as both the standard issue (covering the first 26 weeks of joblessness) and emergency bennies (extending unemployment payments out to 99 weeks) both declined.

So here we are, still.  Initial jobless claims suggest that the pace of layoffs remain much too high at this point in the cycle (and a stunning reality after the slashing of eight million payrolls when the economy was technically in recession).  Thus, one has to surmise that the decline from roughly nine million to 7.6 million in continuing jobless claims is more about those bennies expiring than these people finding work.

Chicago PMI

The Chicago Purchasing Managers Index jumped in June, defying what every other regional manufacturing survey had suggested:  factory activity was on the wane.  Two of the previous three major regional reports slid to contraction (New York and Philly) mode and the one that didn’t (Richmond) printed a weak result.  But Chicago PMI raged to a robust reading of 61.1 for June, the market had expected a decline to 54.0 – a number above 50 suggests activity expanded.

The internals of the report looked pretty good in a general sense, but here are a couple of things to think about:

So we’ve heard, constantly, that the slowdown in factory activity was all due to the Japanese effect as the quakes/tsunami caused supply-chain disruptions as factories were destroyed or had to shut down.  I’ve expressed skepticism over this view as every regional report showed big deterioration in the backlog of orders – and Chicago did too as backlog went negative for the first time since September.  If it was solely a supply problem then the backlog of orders would have been rising as orders remained strong but factories couldn’t deliver product.

Further, the sector most hit by the Japanese shock was the auto sector.  It’s not that big auto production occurred in the Fukushima region but they did a lot of the little things that still held back production.  But Chicago is the main auto manufacturing region and this latest print shows that Japan had no affect on activity there.  So there must be something else that has sent manufacturing production (outside of Chicago) to weak levels.  That seems to me something to consider for the back-half of the year.

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

Have a great weekend and a great 4th!

Brent Vondera, Senior Analyst

Phone: 636-449-4900