U.S. stocks extended the latest round of weakness to three sessions yesterday on continued global growth concerns as the lack of economic activity puts additional hurt on governments with large debt issues (and specifically Spain and Italy regarding current worries).  This flows to increased consternation over the European banking system.  The major indices did, however, pare much of the earlier losses as the broad market recovered substantially from the intra-session low. 

Health care, consumer staples and utilities remain the relative winners – health care was the only major sector to close up.  Financials continue to take a beating, by far the worst-performing group for the year.   Industrials and energy were among the hardest hit. 

Concerns over the banking and debt problems in the Eurozone are flowing once again, European bourses declined yesterday, extending upon Monday’s 5% slide.  Banking sector issues are driving things as interbank lending remains tight and European governments fail to ratify the latest bailout plan.  Further, German factory orders (Germany is the economic engine for the zone) declined a more-than-expected 2.8% for July and no one is expecting August to be much better.

Some the economic concerns are more than evident in the bond market as the 10-year Treasury yield closed below 2.00% for the first time in history to my knowledge.  But yields don’t go this low on economic concerns alone, even assuming another deep contraction.   No, part of this move is about getting ahead of the Fed’s expected Operation Twist – selling short-end position to buy more long-dated Treasurys.  The operation will be Bernanke’s most direct attempt to assist the housing market.  I say it won’t work, but it is certainly further manipulating financial markets. 

And speaking of yet more manipulation, the Swiss National Bank decided to intervene in a massive way yesterday by setting an actual target on the Swiss franc, an upper limit of strength that they are not going to allow the currency to go beyond – the first intervention by the SNB since 1978.  The Swiss franc has been super strong as it’s been in a serious strengthening formation against other major currencies for a year now – the Swiss franc is a traditional safe-haven currency.  This action will keep the euro from falling more than it otherwise would, considering the problems within the Eurozone, as the Swiss will be aggressively buying the shared currency.  It’s also provided a little boost to the Dollar Index. 

Market Activity for September 6, 2011

Sector Activity for September 6, 2011

ISM Service Sector

The Institute for Supply Management’s latest gauge of service-sector activity printed a better-than-expected 53.3 for August (expected to come at 51.0) after the 52.7 in July.  This is a diffusion index, so a reading of 50 is the line of demarcation between expansion and contraction.  Thus, the improvement to 53.3 is good (just below the index’s historic average of 53.8), particularly as we’ve seen many data sets deteriorate.

The internals of the report were decent as new orders, backlog of orders, inventory sentiment and export orders improved – although new orders remain pretty weak at 52.8 and backlog of orders held in contraction mode for the third-straight month.  Export orders were the brightest spot as they rallied 7.5 points to a solid 56.5.  Employment fell, dropping a point to 51.6 (lowest level since September 2010 when the reading was clawing its way back from deep contraction).  Prices paid was unhelpful as it rebounded 7.6 to 64.2.

This gauge of service-sector activity is certainly aided by back-to-school purchases during July and August (and helped too much by a price gauge that is obviously unhelpful to profit margins if these costs are not passed on or a detriment to the consumer if they are) so we shouldn’t get too excited just yet that this reading will escape the a contraction print of sub-50 – the September and October numbers will be very closely watched. 

Nevertheless, this reading shows the economy continues to hold at this level of very low growth we’ve witnessed during 2011.   The problem is that at just 1% GDP growth, it doesn’t take much to knock us into negative territory.   Then again, we’re going to get another short-term stimulus proposal on Thursday night, and while anything that mirrors the programs we’ve already embarked upon will do nothing for longer-term growth, we should see some boost to short-term activity that may keep us out of recession for now. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst