U.S. stocks were whipsawed, 203 points from intraday low to intraday high, as the major indices headed lower following yet another disappointing data release and economists slashed their GDP forecasts.  However, the broad market was saved from extending its losing streak to eight sessions (nine sessions for the Dow, which would have been the longest since 1978) as some big names mused there will be another round of QE.

Consumer staple and utility stocks outperformed in the negative morning session, but gave way to tech, telecoms and industrials as the leaders of the afternoon rally.  Energy was the hardest hit area as the price of crude fell $2 to $91.67/bbl. 

The reversal took place after three former top Fed officials, via a WSJ interview, stated the Fed might need to consider another round of QE.  This was followed by Barton Biggs claim that the government will do anything to keep the economy and stocks from sliding – even suggesting they may just begin to outright purchase single-family homes – Lord, help us.  Regarding the Federal Reserve, my assessment is that they are already contemplating additional action, but it will take a more meaningful correction in stocks (at least 15%) before Bernanke & Co. begin to signal such a move. 

As Spanish and Italian government bond markets continued to crater yesterday (at least in terms of eurozone-era historical interest-rate spreads), Spanish President Barosso issued a statement that was for sure confusing but did seem to seek expansion of the EU bailout fund.  Now, that fund was just expanded a couple of weeks ago, allowed to actually buy Greek debt on the secondary market, but was not intended to be cover for Spanish and Italian woes – don’t even know where they’d come up with the fund for this event without pushing German rates harmfully higher as that country is the backstop.  But that’s where the ECB (EU central bank) comes in to “save” Spitaly?    In fact, these bonds are recovering just a bit this morning as traders hope the ECB will implement a program to aggressively buy Spitalian debt. 

Funny thing, neither the markets nor policymakers want a solution.  No one can handle the short-term hardship associated with a real solution.  Little do they understand, I guess, that the current bailout path means developed economies will simply muddle around at little-to-nothing growth rates. 

Market Activity for August 3, 2011

Sector Activity for August 3, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose 7.1% last week as both purchase and refinancing activity contributed to the move. Still, the index is down 22% year-over-year as refinancing apps are down 30% and purchase apps have rebounded just 6% from the 14-year low of a year ago as the tax credit expired. 

For the week, purchase apps rose 5.1% and refinancing activity increased 7.8% as the average contract rate on the 30-year fixed mortgage fell 12 basis points to 4.45%. 

ADP Employment Change

The ADP Employment Survey estimated that private payrolls increased 114,000 in July (expected to come at 100K) after the 145,000 increase for June, which was revised down from 157K. 

ADP estimates that service-sector payrolls rose 121,000 for the 19^th consecutive month of increase.  Goods-producing sectors cut 7,000 positions as manufacturing payrolls fell 1,000 and construction slashed 11,000 – mining must have increased payrolls but ADP doesn’t line item this sector. 

So ADP has the July increase at 114K, which is just about exactly in line with the expectation for tomorrow’s official payroll report for the private sector.  In total, economists expect July jobs to increase 85K as government is expected to cut positions for the ninth-straight month. 

ADP missed horribly in June as it estimated 145k in job growth but the government’s official reading came in at just +57K in private payrolls.  We’ll see if that official number for June is revised up tomorrow or if there is just a major disconnect – the surveys should come together over the next few months.  I’ve begun to think that ADP is really providing the more accurate picture of the labor market; although, even the better numbers from this survey are way insufficient for what this economy needs.  

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity fell to 52.7 for July from the 53.3 in June – it was expected to inch higher to a reading for 53.5.  This is the lowest level since February 2010 – at least it’s not another 2009 low as we’ve seen with manufacturing and personal spending readings over the past couple of days.  A reading below 50 marks contraction, so that’s the number people watch. 

The internals were weak as new orders continue to fall, down to 51.7; backlog of orders remained in contraction mode for the second-straight month, falling a hard four points to 44.0; inventory sentiment rose a point to 59.5, which means respondents are not happy with inventory levels; the employment measure fell 1.5 points to 52.5, which isn’t the lowest reading we’ve seen over the past few months but it is below the six-month average. 

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Have a great day!

Brent Vondera, Senior Analyst