U.S. stocks shook off a deep decline in the main gauge of consumer confidence to recoup more ground as FOMC voting member Charles Evans drastically increased expectations that more Fed money pumping is on the horizon.  Further, the dissenters to more easing dropped from three to two as the Minnesota Fed’s Kocherlakota stated he may switch from opposition to consent over subsequent meetings.

Telecoms, basic materials and industrials led the broad market higher.  Financial and utilities closed lower.

Remember yesterday we talked about how the Fed’s continued action to prop the stock market results in a harsh reality for the old consumer, as it means stocks can’t rise without bringing the cost of energy in particular with it – the Fed can’t control where this liquidity goes and if traders believe it will foster inflation they’re going right for the areas where that inflation proves evident.  I also noted that this reality won’t stop the Fed from remaining aggressive and rolling out a new round of QE or some other form of excessive accommodation.

Well, yesterday morning we received strong evidence of such as Chicago Fed Bank President Evans signaled more accommodation is coming as he stated “we need to do more.”  He also stated that Fed policy does not drive commodity prices higher.  Bernanke has said the same thing so the fact that they are unwilling to accept the direct relationship between massive Fed easing and higher commodity prices is really no surprise.

Market Activity for August 30, 2011

Sector Activity for August 30, 2011

S&P CaseShiller HPI

The CaseShillers Home Price Index measured that home prices in the 20 metro areas it tracks rose 1.11% in June, marking the third-straight month of increase (that streak follows eight-straight months of decline).  This is on an unadjusted basis, which is the traditional manner by which the measure has been released.  The measure is down 4.52% year-over-year.

The seasonally-adjusted index had prices down fractionally for June (down 12 of the past 13 months), but these adjustments have been rendered pretty worthless as various government policies that have attempted to arrest the housing market turmoil have played havoc with normal seasonal trends.

The increase in the non-seasonally adjusted index mirrors that seen via the existing-home sales reports over the past three reporting months, but it’s tough to get excited about the improvement.

The problem is the sales data are struggling and the recent increase in price is probably playing a role.  We’ve seen sales contracts being canceled at a higher rate (currently at a 16% rate, which is up from 10% a year ago and the more normal 5% when the market is healthy, according to the National Association of Realtors).  One of the reasons for the cancellations is that appraisals aren’t matching up with the contracted sale price.  And one reason the sales price is higher than it should be may just be a result of so many mortgages that are underwater – the seller can’t lower the price because they don’t have the cash to come up with the difference to pay off the mortgage.

Bottom line:  Prices must ultimately fall some more, and they will.  The question is what the government does in the interim.  There’s an expectation that the Obama Administration will roll out another housing “fix” when the president unveils his latest economic/jobs plan on September 5.  Whatever the action is, it may cause prices to rise again on a temporary basis (as we saw in 2009 and 2010 when they did the buyers tax credit), but such behavior only delays the period of time it takes for the market to find it market-clearing price.

Consumer Confidence

Now we see why another round of QE (or some other form of interest-rate manipulation, such as a shifting of the Fed’s balance sheet to longer-dated securities) is coming.  The Conference Board’s gauge of consumer confidence got rocked in August as there is a very positive correlation between confidence and large moves in the price of stocks.  The Fed knows this and that’s why they’ll do whatever they can to buoy the market.

The Conference Board’s survey of confidence (the longest running and most-watched gauge on the subject) plunged 14.7 points to a reading of 44.5 (expected to come at 52.0) – the lowest level since April 2009.  This is a level that’s at or below the low point hit during every recession prior to 2008-2009’s Great Recession since the inception of this confidence gauge in 1967.

The current conditions segment of the survey fell two points to 33.3, which keeps it anchored to reality.

The expectations segment (meant to measure consumers’ expectations of their finances six months out) got clocked back into reality as it slid 23 points to 51.9, also back to past recession lows.

And the Jobs “plentiful” less Jobs “hard to get” gauge worsened by five percentage points as just 4.7% of respondents believe jobs are “plentiful” (no surprise there), while 49.1% believed jobs were “hard to get.”

The inflation expectation 12 months out held at the high level of 5.8%, which is a function of a pump price that remains above $3.50 ($3.62 for the national average).  Economists believe the decline from $4/gallon back in May has freed consumer cash.   I don’t think so and their inflation expectations reflect that angst.

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Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900