U.S. stocks pared early gains in a choppy day of trading (apropos for the month) but held in positive territory as better-than-expected factory activity helped to offset more disappointing housing and employment data.

August was an extremely volatile month, undoubtedly engaging in the most violent swings for a given month in modern history.  In the end the broad market slid 5.7%, which extended the monthly losing streak to four – the S&P 500 is down 11% since April 29.

Financials, industrials and utilities outperformed yesterday.  Telecoms, tech and basic materials were the biggest losers.  The index that tracks telecoms got whacked as AT&T shares lost 4.5% on news the DOJ sued to block the T-Mobile merger.  The company will fight the decision with vigor as the breakup fee is large, AT&T will hand T-Mobile $3 billion in cash along with granting them wireless spectrum if the deal collapses.

The commodity complex rallied for a fifth-straight session led by the industrial metals, OJ and gasoline.  Wholesale gasoline surpassed $3/gal. again – first time since stocks began to slide in early August – but we’ve just rolled into the October contract this morning, which is trading 14 cents lower at $2.87.  Crude was pretty much flat, up just a couple cents to $89/bbl.

As the global growth slide continues, Canada joined Japan as the second major economy to fall into contraction as it printed -0.4% GDP for the second quarter (Japan has seen GDP decline for three-straight quarters.  Exports were the largest drag on Canada’s economic growth, which reflects slower activity across the globe.  People are talking about temporary issues that adversely affected Canadian GDP (how often have we heard that one over the past year?).  I guess we’ll find out when the current quarter’s figure arrives.

Market Activity for August 31, 2011

Sector Activity for August 31, 2011

Mortgage Apps

The Mortgage Bankers Association reported that it applications index fell for a second-straight week as refinancing activity weighed on the measure.

Apps to refinance a mortgage declined 12.2% after falling 1.7% in the prior week even as the average contract interest rate on the 30-year fixed mortgage fell back to 4.32% (roughly a level it’s held for a month as the range has been 4.32%-4.39%).  It appears if the Fed engages in an “Operation Twist” (shifting its balance sheet to longer-dated securities) it will have to be massive (not just shifting but outright buying hundreds of billions more in 10-30-year Treasurys) in order to get mortgage rates down to a level that invokes substantially more refinancing activity.

Purchases weren’t much help as apps to buy a home rose just 0.9% last week after three-straight weeks of decline.  Apps to purchases are down more than half of the time during what is traditionally the buying season and have really fallen off over the past three weeks.

ADP Employment

ADP (one of the largest payroll outsourcing firms) estimated that private-sector payrolls rose 91,000 during August (expected to rise 100K), which follows a 109,000 pickup in July – the official jobs report estimated that 154,000 private payrolls were added in July and we get the August reading on tomorrow.

ADP believes service-sector payrolls rose 80,000 and goods-producing sectors added 11,000 -- manufacturing cut 4,000 but construction actually added 7,000 (this would bring the reduction in construction employment to 2.128 million since January 2007.

So we wait for the government’s official data tomorrow, which is expected to show total payrolls (both public and private sector) rose 70,000 last month.  This is well below the 150K that is needed just to keep up with population growth; we need double this amount for an extended period of time to bring the jobless rate lower.  This doesn’t’ mean that the jobless rate will rise over the next couple of months necessarily as more people may remove themselves from the labor force and thus aren’t counted.  But over time most of these people must come back in to look for work and without 300k/month in payroll growth I suspect the unemployment rate will bump to that 10% level once again.

Chicago PMI

The Chicago Purchasing Managers Index (the region’s factory gauge) continues to hold up even as all other regional manufacturing surveys continue to drag in contraction mode.  The reading did show deceleration in activity for August, but remained at a level that is nicely ensconced in expansion territory.

Chicago PMI came in at a better-than-expected 56.5 for August, down from the 58.8 print for July but a number above 50 suggests expansion.  Activity in what is the largest factory base in the country may be enough to hold the nationwide measure (via ISM) from falling too deep into contraction territory.  This number, which we get this morning, is expected to fall to 48.5 (first contraction print since July 2009).  Still, it will take something at 45 or below to outright suggest the economy has entered recession again.

Most of Chicago’s sub-indices decelerated but remained in expansion mode.  The exception being backlog of orders, which fell to 49.6 – all of the regional surveys have shown backlog of orders are in contraction so it will take a pickup in new orders to keep manufacturing production from additional weakness.  Chicago’s employment index actually accelerated – to 52.1 from 51.5 – but has shown serious deterioration over the past six months.

And adding to the relative optimism from Chicago was a factory orders report that showed July durable orders will be revised up from the original prints we received a week ago.  Overall durable goods orders will be revised to +4.1% from +4.0%; ex-transportation orders to +0.8% from +0.7%; and business capital spending to

-0.9% from -1.5%.  Ex-transportation and business spending orders remain weak as they have been pretty much flat for the year, but a little better than previously believed.

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Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900