Daily Insight: Durables Weak, Political Discord Continues
Written by Brent Vondera   
Thursday, 28 July 2011 06:22

U.S. stocks endured a tough session on Wednesday, extending the latest losing streak to four sessions, as more weak data combined with ongoing discord over the debt-ceiling talks.  As I mentioned yesterday though, to me it seems that deteriorating economic figures has more to do with the past couple days of stock-market weakness than that of the debt-ceiling issue as it’s becoming apparent to all that economic growth is winding even lower.

 

Durable goods orders came in quite weak for June (more on this below), which follows deterioration within the labor market and manufacturing sector while consumer confidence remains drained and housing listless, even with ultra-low rates.

 

Utilities, telecoms and consumer staples outperformed – although even these groups closed lower.  Tech and industrial shares got blasted by nearly 3%; financials and basic materials also lagged the broad market.

 

The combination of risk-off trading mentality and higher crude supplies sent the price of oil lower, but unfortunately not by much as it’s still hanging around in the $97/bbl handle.  The latest report from the Energy Department showed that stockpiles jumped 2.3 million bbls (expected to fall by 2 million).  Gasoline demand was down again last week – off by 3.3% over the past month and 6.6% over the past year.  The national average pump price is $3.70.

 

Remember a couple of days ago we talked about the Italian government cancelling their medium and long-term bond auctions previously scheduled for August.  I have no way of knowing why they did this, but one can surmise that it was on the expectation that the expanded bailout framework EU ministers recently agreed upon would allow the EFSF (bailout fund) to buy bonds on the secondary market – the Italians may have believed the EFSF would be buying bonds by September and thus they’d be able to borrow at cheaper rates.  Well, this morning German Finance Minister Schaeuble (and comments out of Germany mean everything as they are the ultimate backstop for the Eurozone) stated the EFSF would only buy bonds under “exceptional circumstances.”  Spanish and Italian credit spreads are wider this morning as they approach the record wides hit last week – the absolute level markets are watching for is 6% on Spanish and Italian 10-year bond yields; Spain’s already there at 6.08% and Italy at 5.93% -- they don’t have the growth to overcome that 6% cost of money.

 

Market Activity for July 27, 2011

Index

Close

Change

% Change

YTD

1 Yr Rolling %

Dow Jones

12302.55

-198.75

-1.59%

6.26%

16.75%

S&P 500 - Large Cap

1304.90

-27.04

-2.03%

3.76%

17.15%

S&P 400 - Mid Cap

950.05

-27.31

-2.79%

4.72%

23.01%

Russell 2000 - Small Cap

800.57

-24.26

-2.94%

2.16%

20.90%

EAFE - International

1696.67

-22.57

-1.31%

2.31%

14.44%

EM - Emerging Markets

1148.99

-7.57

-0.65%

-0.21%

15.91%

NASDAQ

2764.79

-75.17

-2.65%

4.22%

20.83%

REIT

234.36

-6.73

-2.79%

7.98%

16.35%

Barclays Aggregate Bond

1699.78

-2.49

-0.15%

3.58%

4.24%

 

Sector Activity for July 27, 2011

Index

Day Change

YTD

Consumer Discretionary

-1.77%

6.99%

Consumer Staples

-1.04%

5.16%

Energy

-1.83%

13.20%

Financials

-2.33%

-7.06%

Health Care

-1.73%

8.82%

Industrials

-2.70%

0.74%

Information Tech

-2.95%

3.90%

Basic Materials

-2.30%

0.51%

Telecoms

-0.40%

0.05% 

Utilities

-0.35%

7.34%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Apps

 

The Mortgage Bankers Association’s applications index fell 5.0% for the week ended July 22 after the 15% jump in the previous week – although that bounce was all due to a 23.1% jump in refinancing activity.

 

In this latest week, apps to refi a mortgage fell 5.5%, and purchase apps fell for a third-straight week (down five of the past six weeks and off 12% for the year).  The average contract interest rate on the 30-year fixed mortgage rose three basis points last week to 4.57%.

 

7.28.a

 

Durable Goods Orders

 

The Commerce Department reported that durable goods orders slid 2.1% in June (expected to rise 0.3%) after the 1.9% for May that was unrevised – it was the second decline in three months.  The more important ex-transportation reading, which excludes the extremely volatile commercial aircraft component, rose just 0.1% (expected to rise 0.3%) after a 0.7% pick up in May that was revised up from the 0.6% reported last month – ex-transportation order growth were flat for the second quarter.

 

As a result of the weak orders, the inventory/sales ratio remains elevated.

 

7.28.b

 

The proxy for business capital spending – nondefense capital goods ex-aircraft – fell 0.4% (expected to rise 1.0%) after the 1.7% rise for May.  For the quarter, business spending was up just 3.5%, so it will provide even less help to Q2 GDP than was previously expected.  Thus, the pathetic 1.8% rate of annualized growth estimated for the quarter just passed is likely to come in even lower – we get that number tomorrow.

 

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Have a great day!

 

 

Brent Vondera, Senior Analyst

Phone: 636-449-4900
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