U.S. stocks rallied on bad data as another regional manufacturing gauge plunged and juiced traders’ expectations that Mr. Bernanke will signal something big on Friday.  The market was in the process of erasing opening gains until the Richmond Fed printed much worse-than-expected weakness, at which point stocks ramped substantially higher. 

I’m still not convinced the Fed head will pull the trigger just yet as it may take the 2010 low of 1030 on the S&P 500 to make that finger itchy again, but the data is surely increasing his concern.   One thing is evident, by targeting stock prices as a major agenda of his aggressive easing campaign the Fed Chairman makes his job more herculean with each additional round of QE. 

The fact that stocks ramped higher on a big-bang Bernanke announcement was corroborated by activity within the commodity complex – prices up even as factory data continues to point to recession.  Energy, grains, corn and copper all rose.  The precious metals fell, which is a bit strange on a day additional Fed stimulus drove the market – profit-taking I guess. 

Leading the way were energy, tech and consumer discretionary shares.  Utilities and consumer staples most lagged the performance of the overall market.  Financial, which have gotten whipped by 20% over the past month alone, held in well yesterday despite the market treating Bank of America pretty ugly yet again – to borrow the now famous phrase from Texas Governor Perry. 

And on the banks in general, the group is in a really tough spot as they’ve been without revenue growth throughout this recovery.  They’ve counted on loan-loss releases and a wide yield curve to boost profits and recapitalize.  Now though, the yield curve is in an aggressive narrowing formation, sucking away one of their final lifelines.   Of course, they still have loan-loss provision releases to count on…unless recession hits and consumer delinquency rates rise again.  Whoops, maybe releasing all of those provisions wasn’t such a great idea after all.

On the global growth scene, prospects aren’t looking much better than here at home as China’s PMI (factory activity survey) remained in contraction mode and Eurozone PMI fell to contraction for the first time since 2009.  Also, the zone’s ZEW index of economic growth expectations slid 33 points to a reading of -40.0, the lowest level since December 2008 when it was rising from its record low of -63.5 in July of that treacherous year. 

On the good news front, the FDIC’s list of “problem” banks (banks the FDIC sees as having a heightened risk of collapse) shrunk in the second quarter -- the first time since 2006.  The number fell 23 to 865 banks.

Market Activity for August 23, 2011

Sector Activity for August 23, 2011

New Homes Sales

New home sales fell in July as activity remains virtually nonexistent, which is not much of a surprise as the new-home market cannot compete with the supply of distressed properties hitting the previously-owned market.  The only region to show an increase in sales was the Northeast.  The largest new-home market, the South, saw sales fall 7.4% for the month. 

New home sales slipped 2,000 to 298,000 units at a seasonally-adjusted annual rate (SAAR) in July from a downwardly revised 300,000 in June.  On a non-adjusted basis, just 27,000 new homes sold last month – the record low for July is 26,000, which was hit in 2010. 

The supply of new homes available for sale (seasonally adjusted) fell by 1,000 to 165,000 units, the lowest number on record.  The problem is the market isn’t getting the sales it needs even as this low level of supply as the distressed properties smother activity – new homes can’t compete on price. 

Relative to sales, inventory remained at 6.6 months worth.  This is just above the long-term average, but again, even with very little new-home construction it isn’t crashing to lower levels because of the foreclosure situation. 

The median price fell 6.3% to $222,000, but unless builders are going to take big losses these prices probably won’t fall by a lot more as the cost of construction has jumped again over the past two years – building materials remain higher than the market dynamics would otherwise predict due to the Fed’s aggressive action.

Richmond Fed

The Richmond Federal Reserve Bank’s gauge of manufacturing activity within its region followed the Philly Fed’s plunge (not as nasty but still ugly) as it slid nine points to a reading of -10 for August – the measure was expected to fall to -5.  The -10 print is the lowest level since June 2009 when the figure was recovering from the depths of the 2008-09 recession.

New order volume fell six points to -11, in contraction for four months now; order backlogs slid further into contraction by falling seven points to -25; and the average workweek reading fell five points to -5, the worst level since September 2009.

So, we have seen three regional manufacturing gauges for August now and all three are in contraction mode – the first time three have been in contraction (below zero) for a given month since the recession ended in June 2009. 

We’ll get the regional report that matters most, which is Chicago, on the 31^st and then the nationwide look presented by the ISM survey on September 1.  If ISM slides to a reading of 45 or worse (a reading below 50 for this survey marks contraction), then one can have pretty much confidence the economy has entered recession again. 

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Have a great day!

Brent Vondera, Senior Analyst