U.S. stocks rallied yesterday as the European Union attempts to outlaw default as we knew it and the risks that accompany that event.  Why hadn’t we thought of this before?   The EU’s latest plan to thwart traditional default more than offset a troubling trend of manufacturing weakness out of China. 

Financials, energy and utilities led the rally.  Telecoms, tech and consumer staples lagged, but did close positive for the session.

The big news of the day involved the latest EU bailout plan for Greece, along with the other PIIGS down the road, as finance ministers agreed to lend money to Greece at very low rates for a very long time and also allow the EU bailout fund more flexibility – that flexibility would be to intervene in the secondary debt markets (come in as a buyer when trouble arises) to provide a further backstop for the peripheral governments and be allowed to re-capitalize troubled banks.  

(The following is based on what I heard from the EU press conference yesterday and reporting on the issue, the official terms will be laid out later today.) 

What will occur on Greece is that bondholders will swap 90% of their current “junk” debt for super-supreme (biting sarcasm there) euro bonds that will be guaranteed essentially by Germany and France – yes, another guarantee.  That is, the bailout fund will lend money to Greece for a minimum of 15 years/maximum of 30 years at 3.5%. How exactly do these euro bonds hold a AAA rating when they’re lending to Greece at 3.5% for 15-30 years?  

This of course gets Greece off the hook as their current cost for 10-year money was roughly 20%.   The essential problem of too much debt remains though as this plan allows debt to be transferred (onto the backs of German and French taxpayers) but does not eradicate a meaningful amount of the debt via a traditional default.  We’ll see how it turns out.  This effectively is what developed economies have done since the financial crisis began; thus far it hasn’t worked out real well.

On the Asian scene, HSBC’s Flash PMI reading – an early prediction as to what the actual number will print next week – fell to contraction mode, dropping 1.2 points to 48.9.  If this survey proves correct and the official reading falls below 50 (which marks contraction mode), it will be the first sub-50 reading on Chinese manufacturing activity since February 2009. 

Market Activity for July 21, 2011

Sector Activity for July 21, 2011

Jobless Claims

The Labor Department reported that initial jobless claims remained stuck above the key 400K level for a 15^th straight week as they rose 10,000 to 418,000 for the week ended July 16 (expected to print 410K) – the previous week’s number was revised up by 3,000.

The four-week average fell 2,750 to 421,250 as the 432K from the week of June 24 fell off and was replaced with this latest 418K print. 

But continuing claims keep falling, down 183,000 for the week ended July 9 (there’s a one week lag between initials and continuing claims data).  The standard issue of claims fell 50,000 to 3.698 million and emergency claims (those that extend beyond the traditional 26 weeks out to the European-style 99 weeks) fell 133,000 to 3.698 million. 

Unfortunately, one can’t get too excited about the move in continuing claims with initial stuck above the 400K mark – it’s probably more about continuing claims expiring than these people finding jobs.  And that’s exactly what the monthly jobs data has shown as the long-term unemployment picture remains dark. 

Philly Fed

The Federal Reserve Bank of Philadelphia’s gauge of manufacturing activity came in at a better-than-expected reading of 3.2 for July (expected at 2.0) – it followed June’s

-7.7 print, but a look at the internals showed the headline reading overstated things. 

The headline number was driven by a big increase in the number of employees, up to 8.9 from 4.1 in June, and new orders as they rose from deep contraction. 

However, the average workweek (not a component that affects the headline reading) slid 7.3 points to -5.4.  What does this mean?  It seems obvious to me that the increased hiring occurred in the part-time segment at the expense of full-time workers – hence the decline in the workweek.  Such an event isn’t exactly a development that shines of optimism or helps the nation’s under-employment problem. 

Further, new orders rose from contraction but barely printed a number above zero, the actual print was +0.1.  Also, unfilled orders remained ugly as they were unchanged at

-16.3. 

The headline number beat expectations but I don’t see anything in this report that portends improvement next month. 

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Have a great day!

Brent Vondera, Senior Analyst