U.S. stocks took the hardest beating in a year, and extended the losing streak to the longest since the dark days of 2008, as the market dismisses resolution to the debt-ceiling fight to focus its attention on weakening economic data and European debt woes.

Consumer staples and utilities were the places to hide in the equity markets yesterday.  Of course, this is on a relative basis as even these groups lost ground.  Consumer discretionary and industrials led the market lower as they got clocked by more than 3.5%; basic materials and financials were also among the hardest hit.

As I stated yesterday, this week was supposed to be all about the debt-ceiling passing Congress (even though budgetary substance was virtually nonexistent), but economic reality has reared its ugly head to take center stage – Asian, European and the U.S. economies continue to slow, and for the latter two it means big trouble for the European debt scene and little if any ability to drive job growth here at home.

The greenback rallied, but not by much as it closed at 74.50 on the Dollar Index – the all-time low is in the 71 handle.  Crude settled at $93.83/bbl – down from $100 a week back; wholesale gasoline slipped a penny to $3.04/gal – the national average pump price is remains at $3.70.

The Treasury market remains hot as a pistol as the yield on the two-year hit an all-time low of 0.32% and the 10-year rallied to 2.61% (yields fall as prices rise) -- lowest level since last fall just as QE2 was about to roll out.  This is not to say the Fed will bring the next round immediately, they won’t; but bonds rally well in advance of more Bernanke buying.   Beyond the QE trade, the bond market sure looks to be heavily predicting the return of recession.

Market Activity for August 2, 2011

Sector Activity for August 2, 2011

Personal Income & Spending

The Commerce Department reported that personal income rose just 0.1% in June (expected to rise 0.2%) and the May reading was revised down to +0.2% from the +0.3% that was initially reported.  The vital wage & salary component was flat, which is the first month it hasn’t risen since November.  Disposable income (after-tax income) also rose 0.1% after the 0.2% in May -- adjust it for inflation and the year-over-year change has decelerated to 1.1% from 3.8% as of October.  (And it is looking like the two percentage-point payroll tax rate reduction is not going to be extended into 2012, so after-tax income is going to take a big hit unless somehow incomes jump to offset it.)

On the spending side, consumer outlays fell 0.2% in June (expected to rise 0.1%) after rising just 0.1% in May, which was revised up from no change according to the previous report.  This was the first monthly decline in spending since September 2009.  Adjust this spending for inflation and it was flat for June after two months of decline for May and April.

The second quarter GDP figure may be revised down from the already anemic 1.3% rate that was initially estimated on this weaker-than-expected spending result.  And for the current quarter (Q3), this means we enter it with no momentum.

The cash savings rate rose to 5.4% from 5.0% in May as incomes outpaced spending.  This is exactly what we need to occur.  It hits GDP in the short term but is a necessary condition in getting household balance sheets right again.  The problem is at this pace of job and income growth it will take a very long time to repair household debt levels – we need robust growth to repair things within a reasonable length of time.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900