U.S. stocks rallied for a second-straight session and for the fifth session in six.  The narrative for yesterday’s move was optimism that U.S. growth would accelerate.  This had pretty much been the hope for at least a year now since decelerating back to low 2% growth in at the end of 2010 and now down to below 1% during this year’s first half.  After seeing the data for July and some for August, I don’t see how anyone comes up with this story, but, as I like to say, we’ll see.

Some also pointed to the fact that Irene didn’t inflict the havoc that was expected, but stocks were up on Friday when the uncertainty was still in play, so I’m not seeing that as the reason either.

Financials, industrials and basic materials led the rally.  Telecoms, consumer staples and utilities were the laggards, but the latter two still managed gains of nearly 2%.

Regardless of why the market has bounced again off of the near-term low of 1120 on the S&P 500, the correction has been pared back to a decline of 11.5% relative to the April 29 three-year high – at its worst the decline has been 18%.  Now that we’re back to the top end of the recent range for the third time in two weeks, we may need some real juice to keep this thing going.  We’ll run into some tough data later in the week (confidence, ISM and Aug. jobs report), but with just about everyone now sharing the view that more QE is on the horizon maybe we don’t need economic help.

Unfortunately for the old consumer out there, stocks can’t go higher without bringing the price of fuel along with it – it’s the trap Bernanke currently finds himself in, but it won’t stop him from continuing the aggressive monetary path.  Crude rallied $2 to $87.34/bbl and wholesale gasoline is chillin’ at $2.96 – that corresponds with $3.60 at the pump, which is actually where the national retail average resides this morning.

Can’t go without mentioning something from the Euro scene these days, so we’ll look to Greece where the major stock index jumped 14% on news that the country’s two largest banks will merge (their bonds remain in reality land though as they traded lower).  I’m not sure why this merger, which creates a new largest insolvent bank in that troubled country, is seen as a positive but for at least one day the equity market over there liked it – then again the Athens Composite was down 85% from the four-year high in 2007 so bounces will occur.

Market Activity for August 29, 2011

Sector Activity for August 29, 2011

Personal Income

The Commerce Department reported that personal income rose 0.3% in July (matching expectations) after a revised 0.2% increase for June (up from the 0.1% initially estimated).  Depending on the inflation gauge, personal income has been negative flat in real terms for six months but is still up between 1.7%-2.4% year-over-year.

For the income that counts though, real disposable income (inflation-adjusted after-tax income) was down 0.1% for July, the first monthly decline since September.  I tis up 1.2% year-over-year.

I expect the inflation gauges to come lower over the next few months, but income growth may decelerate too as inflation will fall because of further economic weakness.

The good news was that the most important aspect of income managed a 0.4% increase – I’m speaking of wages and salaries.  This component is up 3.7% on a year-over-year basis; it’s slightly positive relative to the inflation gauge that it tied to this report (which is up 2.9% y/o/y) but flat relative to CPI (which is up 3.6%).

The strongest aspects of income over the past year have been farm income (up 19.8% y/o/y), rental income (up 14.1%) and dividend income (up 9.2%).   Government transfer payments (from those working to those who aren’t) continue to rise at greater than a 4% clip y/o/y and total income remains much too dependent upon government spending.

Spending came in at a much stronger-than-expected 0.8% (estimated to rise 0.5%) after the 0.1% decline in June – the overspending relative to income was the largest since October 2009 and is what commentators were saying is the latest news that juiced the market.  However, roughly half of this increase was due to price increases and much of the rest was a result of back-to-school spending and car purchases (following weakness of the previous couple of months) –drivers that won’t be there for the August spending data.  This was the first month in which real spending rose since March.

The cash savings rate fell to 5.0% in July from 5.5% printed in June.

Dallas Fed

The Dallas Fed’s gauge of manufacturing activity remained in contraction for August, marking the fourth regional factory report to post a negative print.  The reading slid 9.4 points to -11.4; it’s been negative for four months now.

The big factory reading comes on Thursday via the ISM Manufacturing, which is expected to post its first contractionary print since July 2009 – recession officially ended in June of that year.  What we really want to watch for is how deep in contraction it prints (for this gauge a number below 50 marks contraction).  It will take something at 45 or below to send a clear signal recession is here; it’s expected to come at 48.5.

Pending Home Sales

Pending home sales (contract signings for purchase of a previously-owned home) fell 1.3% (a bit worse than expected).  Sales are counted when the contract closes, but since cancelations are running at a higher rate than normal (due to appraisals not meeting the selling price and a weak labor market), one can expect the official July sales number to be weaker than this pending figure suggests.

Contract signings fell in three of the four regions; the gain occurred in the West.

A reading of 100 on the Pending Home Sales Index is supposed to indicate a “historically healthy” housing market.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900