U.S. stocks followed European bourses higher yesterday as major Eurozone indices bounced after a four-session smack down that had sapped another 10% from those markets.  The euro scene is all our markets really had to go on yesterday, at least at the outset, as we were without a major economic release.  (Well, there was the latest mortgage applications report, but more of the same dim activity there.)

The about two hours into the session, comments from one of the FOMC’s most dovish members appeared to offer the market an additional boost.  FOMC member Charles Evans continued his dovish comments (dovish meaning that he dismisses any inflation threat and desires yet more monetary easing), in fact upping last week’s call for more accommodation as he stated: “The Committee should “seriously consider very significant amounts of policy accommodation.”   He referred to current conditions that “aren’t much different from an economy actually in recession.”  This definitely suggests the central bank will be doing more than simply extending ZIRP further out along the yield curve via more long-dated purchases – that Operation Twist we’ve talked about for a couple of weeks now.

The price of crude powered back to $89/bbl, after falling to $83 on Monday, and wholesale gasoline to $2.90/gal.  So as you continue pay to $3.65 at the pump (national average) even as the economy muddles at a 1% rate of growth, struggles with unusually high joblessness and weak energy demand, you can thank Bernanke & Co.  Instead of continuing down this unprecedentedly aggressive monetary path (which has done nothing to spur the economy to trend growth), the Fed should have advised the federal government to unleash a serious pro-growth agenda so that they (the Fed) can conduct policy in a manner that doesn’t do consumers harm via high commodity prices -- prices that are currently asymmetrical to the level of economic growth.

The year’s most beat down sectors (financials and industrials) led the charge yesterday; energy was also among the movers.  Utilities, telecoms and consumer staples (utilities and staples are the year’s best performing groups) were the laggards.

This morning we wait for the ECB press conference and then Obama unveils his latest jobs proposals tonight – one hopes the plan involves more than the fruitless same, such as extending jobless benefits yet again out to as long as two years, nonspecific infrastructure spending and very temporary tax rates reductions via FICA withdrawals.

Market Activity for September 7, 2011

Sector Activity for September 7, 2011

Mortgage Apps

The Mortgage Bankers Association reported that its applications index fell for a third-straight week (and for nine of the past 15 weeks) as refinancing activity fell again and purchases were flat.

Applications to refinance a mortgage fell 6.3% (off 35.7% y/o/y) and purchases rose a scant 0.2% (down 13.5% y/o/y) even as the average contract rate on the 30-year fixed mortgage nearly matches the record low of 4.21% -- the rate was down nine basis points to 4.23%.

Part of the reason mortgage applications are low is that there are more cash purchases occurring right now as there’s a glut of distressed properties on the market.  However, on the negative side of things activity is also weak simply because of poor economic performance and a labor market that’s in bad shape.

So this appears to be what the Fed will target with its Operation Twist strategy (assuming the expectations come to fruition) as they seek to send long-end yields even lower.  But as we’ve talked about for a while now, there really isn’t an interest rate that’s low enough to sustainably fuel the housing market so long as the level of joblessness remains very high and under-employment higher.  And as we touched on last week, if the Fed’s going to flatten the yield curve by selling short-term Treasurys to buy long-dated securities (which has already begun to occur as the curve is at its flattest point since March 2009) then the banking system will find it’s in an even deeper level of hurt as net interest margins continue to shrink.

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Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900