Most U.S. stocks erased pretty good morning-session gains (the broad market was up nearly 1%) as economic reality appears to be setting and most people realize the Fed isn’t going to rescue things with their next round of monetary stimulus until the market endures a meaningful correction – it took a 16% correction last spring/summer before they stepped in with QE2.

Tech, financials and consumer staples – a strange mix of cyclical and safety – closed higher for the session.  Telecoms got hammered by more than 2% to lead the other industry groups lower.

Despite the day’s economic reports beating expectations yesterday (more on that data below), more people are coming to grips with the fact that economic growth is deteriorating from already weak levels, and it’s not just analysts finally coming to this conclusion.  Consumers clearly are feeling it as the Conference Board’s confidence reading has shown that respondents’ view of current economic conditions has been unable improved from deep recessionary levels.  In addition, Bloomberg’s measure on confidence, just out yesterday, illustrated that consumers’ view on the state of the economy hit the lowest level since the recession technically ended in 2009.

The Japanese yen remains en fuego as that currency, along with the Aussie and Canadian dollars, has been a nice place to hide for traders over the past month.  So much for that G-7 intervention, meant to weaken the yen, back in March as dollar/yen went below the super-strong mark of 80 for the first time in history (a lower number means yen strength).  Now it’s powered well beyond that mark to the 77 handle.  This will keep Japan buying a whole lot of U.S. Treasurys as they’ll need to in order to keep the yen from going completely stratospheric – that economy, which is so dependent upon export growth has to be extremely worried about yen super-strength.

EU finance ministers agreed on a new bailout plan last week but sovereign-debt contagion risk continues to grow nevertheless as bond yields in Spain and Italy jump and approach record wides (relative to benchmark German yields).  Spanish long-term yields are back above 6% and Italian yields are essentially there.  Italy’s economic growth has averaged just 1% over the past 20 years and Spain is proving that their rate of growth can’t muster 1% without wildly speculative housing behavior and irresponsible lending.  Thus, many see a 6% cost of borrowing as the rate of no return for these countries and brings contagion risk to the forefront.

Market Activity for July 28, 2011

Sector Activity for July 28, 2011

Jobless Claims

The Labor Department reported that initial jobless claims finally dipped below the 400K mark (after 15 weeks above that level) – although since these claims are revised higher about 90% of the time, by next week we may just see that the unfortunate streak continued.

These initial jobless claims fell 24,000 last week after the previous print was revised up 4K to 422,000 (expectations were for a 415K print) – fewer furloughs in Minnesota (after that legislature came to agreement that ended a government shutdown) helped push the figure just below the 400K mark.

The four-week average slid 8,500 to 413,750.

Continuing claims (those on benefits for two week or more) went in the other direction a bit as they rose 46,000 to 7.462 million.  Standard claims (those that cover the first 26 weeks of joblessness) fell 17,000, while emergency claims (those that extend bennies out to 99 weeks) rose 63,000.

So we’ll see if initial claims can remain below 400K over the ensuing weeks, and more importantly can make it down to the 350-365K range that will suggest higher monthly payroll growth has returned.

Pending Home Sales

Pending homes sales (those counted when a contract is signed to buy an existing home) rose 2.4% during June, which marks the second-straight month of increase as May pending sales rose 8.2%.

For reference regarding the chart below, a reading of a 100 is consistent with the average level of contracts in 2001 when the National Association of Realtors (NAR) created the index.  It also coincides with “historically healthy” home buying, according to NAR.  Of course, based on the supply dynamics (and I’m talking about the shadow supply as there are 4.5 million borrowers that are seriously delinquent) we need much higher sales volume than that which is deemed “historically healthy.”

We normally watch this reading for evidence of how the following month’s official existing-home sales turn out (officially counted when the contract closes a month later), but the figure hasn’t been as reliable lately.  The reason for this is that contract cancelations are running four times the normal amount as appraisals aren’t matching up with the recent increase in home prices that’s occurred over the previous two reporting months.  Also, buyers may be backing out due to job loss – it’s not all about the appraisal falling short of the contracted selling price, but that’s got a lot to do with it.

So, we can’t have much confidence we’ll see a bounce in existing-home sales when the June number is released next month, not until prices fall back again to levels that are commensurate with comps and those appraisals that are necessary for a home loan.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900