U.S. stocks were able to shake off another interest rate increase by the Bank of China (BoC) to close higher for the sixth session in seven.  The broad market ended just slightly higher, but the Dow Industrials recorded a more substantial increase thanks to the shares of IBM, Caterpillar and 3M.

Consumer staple, industrial and tech shares led the broad market to its gain.  Telecoms and financials weighed on the S&P 500 Index.

Stocks were pressured in early trading by more tightening in China as the BoC raised the benchmark interest rate for the third time this year and the fifth increase for this tightening campaign.  This accompanies aggressive hikes in the reserve ratio requirement for its banking system – the Chinese have raised this ratio (which is meant to curtail lending, at least on-balance sheet lending) something like 15 times over the past 18 months.

This policy tightening is all done in effort to quell escalating inflation.  It has an effect on our market because about half of our corporate earnings are coming from overseas right now.   If the Chinese fail to foster a soft landing then global growth will be in serious trouble, something the developed-economy debt situation cannot afford.

On Tuesday, Moody’s slashed Portuguese debt several notches, sending their bonds deep into junk territory.  Government officials are having a fit as those bonds take another drubbing – blowing out to new wides against the German benchmark; they’re now talking about creating their own rating agency.  That’s a peach isn’t it?  The current ratings agencies have proven to be late to the game (to put it kindly) over the past several years, but to have the Portuguese establish an agency, surely to be directed by the government, would be quite the farce – which is why it’s not a serious consideration but I found it interesting enough to note.

Market Activity for July 6, 2011

Sector Activity for July 6, 2011

Mortgage Apps

The Mortgage Bankers Association’s gauge of applications fell for a third-straight week as it was held down by refinancing activity.  Apps to purchase a home rose for the first week in three.

Refinancing activity slid 9.2% last week as the average contract interest rate on the 30-year mortgage jumped 23 basis points to 4.69%.  However, purchase applications did increase as they rose 4.8%, though the move wasn’t enough to fully offset the decline of the previous two weeks.

ISM Service Sector

The latest from the Institute for Supply Management showed that its service-sector gauge decelerated to a reading of 53.3 for June after the 54.6 in May – a reading above 50 means that activity within the sector continues to expand.

This is still a good level for the index (as the average line in the chart above illustrates), it’s just that the three-month average has declined to 53.6 after running close to 60 during the prior six-month period.

The main points of the report were:  New orders fell three points to 53.6, that’s down from 64 during the first quarter; backlog of orders slid 6.5 points to contraction mode; inventory sentiment rose 3.5 points to 58.5, meaning more respondents are not happy with their inventory levels; and the employment gauge held at a good range, up just slightly to 54.1.

Not a bad report, but the internals do suggest further weakness may be coming over the next couple of months.  Considering GDP is running at just 2.0%, we really need much more from this segment of the economy.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900