U.S. stocks continued their latest bounce as word out of Europe is that the Greeks are dropping the referendum (for now at least) – this is the vote that was meant to determine whether or not the Greek people wanted to accept the full bailout and thus remain in the eurozone.  The news was enough to pull the market from negative territory an hour into the session, ending higher by nearly 2%.

Also helping traders look beyond high jobless claims and a relatively weak service-sector reading was talk that G-20 leaders are working on bringing in other nations to take a larger role in Europe’s debt crisis (not directly of course but via the IMF).

Energy (the price of crude has rallied to $94/bbl), industrials and tech led the market higher.  Utilities, health care and staples lagged, but posted gains if more than 1%.

Back to this G-20/IMF news/rumor – it’s tough to decipher between the two these days, this kind of talk can enhance stock and bond valuations in the very short term, but for those looking beyond the hourly trade, when will policymakers allow the market to stand on its own?  And markets certainly can survive quite well on their own.  The issue is policymakers don’t like where the markets want to take us.  This is a key issue to think about because we won’t get this up, down and essentially nowhere direction behind us until markets are allowed to behave without backstops, bailouts and manipulation.

The new ECB (eurozone’s central bank) President Mario Draghi held his first meeting yesterday, more on his first move below the click.  But first, here are some of the key points from the October jobs report that was just released:

  * +80K in total payrolls (short of 95K expected, but the revision over the past two months showed 102K more payrolls than previously believed

  * The unemployment rate fell to 9.0% from 9.1% as household employment rose 277K while just 181K re-entered the workforce

  * Long-term unemployment problem improved, but remains at historic heights

  * Average hourly earnings rose 0.2%, up 0.1% over the past three month and 1.8% over the past year (down from 2.2% as of September)

Sector Activity for November 3, 2011

Draghi decided to cut the benchmark interest rate 25 basis point to 1.25% -- over the past six months they had inched that rate up from the emergency level of 1.00% (it seems they’ll be going back to that emergency level again over the next couple of months).

The ECB obviously finds it necessary to provide all the assistance it can as longer-term Italian bond yields have risen above 6% (a level seen as unsustainable from a debt service perspective), the zone looks headed for recession (Draghi stated the zone has already entered a “mild” recession) and the entire euro system may begin to crumble if Greek leaves the zone.  For sure Draghi has aims of getting back to the 1.00% emergency level (and maybe lower) but didn’t want to spook the market with a 50 basis-point cut yesterday.

Q3 Productivity

Productivity rebounded in the third quarter after two quarters of decline, increasing a strong 3.1% for the period.  This number is obviously a bit diminished by the fact that productivity hasn’t been on a roll – 3.1% is really nice on its own, but not so much after two quarters of decline.

And the results didn’t speak to well with regard to the labor force.  Productivity is a measurement of output per hour worked.  The figure got a boost from a 3.8% increase in output during Q3, while hours worked rose just 0.6% -- the weakness result since early 2010.  Good for businesses bottom line but not so good for the consumer.   And the report also showed that compensation per hour rose just 0.6%, with real (inflation adjusted) compensation getting killed, down 2.4%.  These are annualized numbers.

Jobless Claims

The Labor Department reported that initial jobless claims fell 9,000 to 397,000 (only the third week out of the last 30 it printed below 400K) after yet another upwardly revised figure in the previous week.

The four-week moving average slipped 2,000 to 404,500.

Continuing claims rose 24,000 as the standard issue (those that cover the first 26 weeks of joblessness) fell 15,000, while emergency claims (that pick up when the standard claims expire and extend bennies out to 99 weeks) rose 39,000.

And that previous week that showed a big 96,000 reduction in standard claims (the one we said to take with a grain of salt as upward revisions have quite the streak going) was actually only a 41,000 decline, as reported by the revision.

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity ticked lower by 0.1 point to 52.9 for October (expected to rise 0.5 point).  The measure has remained just slightly above the line of demarcation (a reading of 50) that separates expansion from contraction.

So this gauge is holding up a bit better than ISM’s manufacturing gauge, which fell to 50.8 for October, but a number below 53 on the service-sector gauge is disturbing as the service sector accounts for 85% of U.S. economic activity.

Since we’re entering the holiday shopping season, ISM service is likely to hold above the 50 threshold, and may even improve just a bit.  However, I think it’s pretty much a foregone conclusion that this measure is going sub-50 in early 2012.   Next year will be the first year that consumers will be without a main source of stimulus – the home-buyers tax credit.  That $8,000 tax credit was in place for 2009 and 2010, thus it boosted tax refunds in early 2010 and 2011.  Refunds will be much lower in 2012 as a result and this is likely to adversely affect spring spending.  It’s exactly why short-term stimulus is not an effective policy.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900