U.S. stocks got hit hard again yesterday as the bounce from last week’s low point has nearly been erased.  It appears we’re in a classic retest of that low, which is 1120 on the S&P 500.

A number of things hit the market yesterday, beginning with a new level of concern regarding short-term funding for the European banking system, the slashing of both domestic and global GDP forecasts and then a Philly Fed report (gauge of factory activity) that showed the second-largest monthly plunge in the survey’s history. 

Utilities, consumer staples and telecoms outperformed, but even these sectors closed lower.  Hit the hardest were basis material, energy and industrial shares, which got smashed by nearly 6%.   Tech and financials didn’t fare much better.

The global growth worries extend beyond Europe and the U.S. as Japanese exports slid 3.3% in July as decelerating U.S./Euro growth and a crazy-strong yen hits Japan hard.  So much for that post-tsunami revival as Japan is very likely to post a fourth-straight quarter of negative GDP on this news. 

One of the big stories of the day was a WSJ article stating that the Fed is keeping very close contact with European banks, specifically regarding their U.S. operations.  The concern is that if European banks run into short-term funding problems (and reportedly some indications of such problems have arisen) then they’ll have to siphon funds out of U.S banking institutions.  The Fed will re-open currency swap lines to ameliorate this problem, but for now the liquidity concerns are rolling.  European banks got hammered as the continent’s bourses took roughly a 4% hit across the board – and down another 2-3% this morning.  This fear has funneled into our markets as financials have led this broad market slide

Wow!  The yield on the 10-year Treasury went sub-2.00% at one point yesterday morning and even as yields backed up a bit from session lows, that market remained on fire as the 10-year yield settled at 2.08% -- down eight basis points.  The yield on the 30-year fell 14 basis points to 3.42% -- and ominous sign. 

Market Activity for August 17, 2011

Sector Activity for August 17, 2011

Consumer Price Index

The Labor Department reported that the consumer price index (CPI) rose a much higher-than-expected 0.5% (expected to climb just 0.2%) in July as gasoline prices bounced last month off the May-June slide.  Apparel prices have also looked ugly for a few months, up 16.4% at an annual rate over the past three months as they reflect the higher cotton prices from early in the year.  The year-over-year headline CPI reading held at 3.6%

The core rate rose in line with expectations, up 0.2%.  The year-over-year number rose to 1.8% from 1.6% in June. 

So y/o/y headline CPI remains at 3.6% (expected to fall to 3.3%) but as I keep reminding everyone, these inflation gauges are lagging indicators.  You generally see them peak just prior to recession and then come crashing lower after economic contraction begins.  I’m not one to believe we can’t have high inflation without growth, there are instances of this occurrence, but in this environment in which commodity prices are very correlated to stocks we’ll see both come down at the same time and that will bring the inflation gauges lower…until Bernanke rolls out the next round of QE, but we’ve likely got a few months before that occurs. 

Jobless Claims

Jobless claims popped back above the 400K mark in the latest week as they rose 9,000 to 408,000.  The previous week did break the 17-week string of 400K plus at it was revised up to just 399K. 

The four-week average fell 3,500 to 402,500. 

Continuing claims fell as emergency claims (those that extend out to 99 weeks) fell nearly 44,000, which overwhelmed the 7,000 increase in standard claims (those that cover the first 26 weeks of joblessness).  Total continuing claims stand at 7.359 million.

Emergency claims that extend out to 99 weeks are scheduled to expire at the end of the year, which if allowed to will bring the continuing claims number crashing down.  The problem is that those who are trapped in long-term unemployment (roughly six million people) will not have work by that time and that will smash consumer spending -- I have an opinion on this subject but it’s too harsh to get into; suffice it to say I do not believe that extended benefits are beneficial for our society.  Most politicians view things differently though, and since we are flirting with recession right here, there is no way Congress will allow those extended-period of claims to expire, even in this budget environment. 

Philly Fed

The Philly Fed index collapsed for August, marking the second of the regional manufacturing reports that we’ve received thus far for August to print contraction.  But unlike the Empire report (NY factory activity), this one crumbled by the second-deepest monthly point loss in its history – the record was the 37.5-point plunge in October 2008.

The index fell 33.9 points to -30.7 in August (expected to print +2.0) as new orders slid 26.7 points to -26.8 (lowest level since early 2009), unfilled orders fell further into contraction to -20.9, delivery times plunged 24.5 points to -18.1, and the average workweek fell nine points to -14.4. 

The six-month outlook for business activity slid 22.3 points to 1.4 – the lowest level since 2008.

The Empire and Philly factory reports are signaling recession is here.  I’m still not sure we’ll actually print two quarters of negative GDP with the Fed as aggressively easy as they are, but whether it’s negative or growth that is muddling around this sub-1.0% range it really doesn’t matter. 

Existing Home Sales

Previously-owned home sales fell 3.5% in July to 4.67 million units at a seasonally-adjusted annual rate (SAAR) from an upwardly revised 4.84 million in June.  The July number was expected to come in at 4.90 million. The decline was all due to single-family sales, which fell 4.0%; condos/co-ops sales were flat last month. 

The supply of previously-owned homes available for sale fell another 65,000 to 3.652 million units – and for single-family only the number fell 17,400 to 3.054 million.   The official supply numbers have been in somewhat steady decline over the past year, but remain well above average. 

Further, as a percentage of sales the supply ratio increased 0.2 to 9.4 months worth of supply.  This is well above the 6.0 months worth of supply that indicates a healthy market.   Add in the shadow supply, all of those foreclosures that have been delayed but will eventually hit the market, and the supply ratio may be 15 months worth. 

Part of the problem for sales is sellers are unwilling to bring their prices down – probably because they can’t as they put down very little money at purchase and owe more than the house is actually worth.  The median price of an existing home fell just $1,300 to $174,800 last month. 

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Have a great weekend!

Brent Vondera, Senior Analyst