U.S. stocks traded all over the map yesterday.  The major indices began the session up nicely on news that Congress had come to compromise on the debt-ceiling issue, then fell to the session’s low point after a bad manufacturing report (the worst print since dark days of 2009), only to recover most of those losses late in the day.  Yesterday was supposed to be all about an end to the debt talks, but disappointing economic data got in the way of things yet again.

Telecom and utility shares were the only of the major industry groups to close the session higher; health care and consumer discretionary shares led the market lower.

The debt deal that has now passed the House and will soon pass the Senate gives President Obama his debt-ceiling increase beyond the next election ($917 billion now --which isn’t even “now” as it is a 10-year reduction -- and up to another $1.5 trillion to be defined a couple of years down the road).  So the current cuts add up to $92/year, and a completely meaningless $25 billion in the first year, as most of these future-year cuts appear to include the wind downs of Iraq/Afghanistan.  All of this is off of a baseline that’s been inflated by massive spending increases of the past three fiscal years; none of this actually amounts to “cuts” in spending anyway as outlays will be higher over the next few years than they are today, they are just reductions in projected spending increases.

This is debt deal is what we expected would occur, a debt-ceiling increase without budgetary substance.  Now let’s see what S&P does as they stated last week that anything weaker than $4 trillion in deficit reduction would trigger an automatic credit-rating downgrade.  I’m guessing those words were vacuous.

Beyond all of this debt talk, we still have this little problem of growth, and it’s not just in the U.S.  Factory gauges in Europe and Asia continue to decelerate as they are right on the cusp of contraction. Eurozone PMI (factory gauge) printed 50.4 for July, down from 52.0 in June – Britain’s (which if not part of the zone) fell to 49.1.  China inched lower to 50.7 from the 50.9 print in June.  A reading below 50 marks contraction.

Things are crumbling again in the eurozone as Spanish and Italian interest-rate spreads widen to record levels; European equity bourses are down again this morning after getting smacked by 2.5-3.0% across the board yesterday.  U.S. stock futures are substantially lower and the Treasury market remains on fire as the yield on the 10-year is down to 2.68%.

Market Activity for August 1, 2011

Sector Activity for August 1, 2011

ISM Manufacturing

And as global factory gauges fall to the cusp of contraction, our own did as well as the ISM for July fell 4.4 points to 50.9 – expected to come at 54.5.  This is the lowest print from the Institute for Supply Management’s nationwide factory gauge since July 2009 when it printed 49.0 – back then though, it was rising from the depths of the recession’s low point of 33.3 hit in December 2008.

The internals were pretty ugly with new orders falling to 49.2 – first time in contraction mode June 2009; the backlog of orders measure fell even deeper into contraction mode, down four points to 45.0 – lowest level since April 2009; supplier deliveries down 5.9 points to 50.4 – lowest since May 2009.   The employment measure slid 6.4 points to 53.5 – a lagging measure that may just go sub-50 for August.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900