U.S. stocks sank for a sixth-straight session on Wednesday as the European scene continues to worsen and the day’s U.S. data did help.

As has been the case for 2011, safety was the name of the game Wednesday as consumer staples, health care and utilities outperformed.  Energy, basic materials and financials were the hardest hit.

The situation in Europe is outright nasty.  Wednesday morning there was that failed German bond auction, which was followed by the poorest manufacturing data in the eurozone since 2008 as its PMI number sank to 46.4 for November – a number below 50 marks contraction.   The PMI reading specifically out of Germany – remember, this is the backbone of the zone – printed 47.9.

And it’s more than just the manufacturing numbers in the zone that signal a major problem.  Their import activity is sliding (which is causing Chinese factory activity to contract), industrial orders posted the largest drop since the financial crisis began three years ago, their banks are having serious funding problems (relying heavily on the ECB), government bond auctions getting ugly and equity markets have slid 30-40% from recent highs.  And this all occurs for a eurozone that has already seen GDP decelerate to under 1% on an annual basis over the past couple of quarters.  I think it’s safe to say another European recession just two years after the previous contraction is inevitable and has probably already begun.

All the while, even with our own debt problems (check the chart below, the surge in tradable U.S. debt), our auctions have enjoyed a flood of demand (2, 5 and 7-yr auctions all saw huge bidding this week).  Where else are institutions going to put their money?   The U.S. Treasury market is the only place with the breadth and liquidity.

Market Activity for November 23, 2011

Sector Activity for November 23, 2011

There was a plethora of data all stuffed into Wednesday’s release schedule due to the Thanksgiving holiday, so I’ll just briefly touch on each:

Durable Goods

The Commerce Department reported that durable goods orders fell 0.7% in October.  On the surface, this was better than the 1.2% decline that was expected, but it came off of a downwardly revised 1.5% drop in September – that was double the decline previously estimated.

Excluding transportation orders, durables rose 0.7%, much better than the 0% expected, but was off of a massive downward revision to the September data – instead of the 1.7% increase previously expected, these orders rose just 0.6%.

On non-defense capital goods ex-aircraft (the proxy for business equipment spending), orders slid 1.8% after a 0.9% pick up in September – that number was also revised down big as it was previously estimated as a 2.4% increase.

Jobless Claims

Initial jobless claims rose a touch but remained below the 400K mark for a third-straight week.  Initials came in at 393,000 after the previous week’s upwardly revised 391K.  The four-week average fell 3K to 394,250.

Continuing claims (those accepting benefits for longer than two weeks) rose as the standard issue of claims (covering the first 26 weeks of bennies) rose 68K, while the emergency level of claims (extending bennies up to 99 weeks) fell just 7K.

Personal Income & Spending

The best news of the day came via the personal income report as it showed a 0.4% rise (better than the 0.3% expected) after two months of no change and five months in which the number has barely risen.

The most important aspect of this report (the wage & salary component) rose a very nice 0.5%, but of course the government transfer payments figure made a comeback with a 0.3% rise.  That government number had declined for three months in a row, which is also a reason the overall number has been weak, as government help has been depended upon to close the gap from other areas of income weakness.  The problem is, while this helps the private sector in the short term, it drives the government’s fiscal position deeper in the hole.  And when it comes time to dig out of that hole…well, you can figure it out.

The spending side of the report disappointed (not me as consumer spending has outpaced income for a number of months and it needed to end, but it disappointed the consensus) as it got the fourth quarter kicked off on the poor note.   Personal spending (which is the largest component of GDP) rose just 0.1% for October.  It looks a lot like how we started off the second quarter, which posted very weak consumer activity.  However, holiday shopping will probably save the quarter, but it won’t help the first half of 2012.

The good news is the cash savings rate was able to rise to 3.5%, the first increase in three months – the rate has been sliding since June 2010 when it hit 5.8%.

U of M Confidence

The University of Michigan’s final consumer confidence reading for November came in a bit shy of the initial print a couple of weeks back, printing 64.1 instead of the 64.2 via the initial look.

While this reading remains at a depressed level, it has improved nicely over the past four months, coming off of August’s 2008-like near-term low.

However, the other major confidence measures have failed to show improvement – the longest running measure of consumer sentiment is the Conference Board’s measure and that one is tanking again.  So, based on all that is occurring, you can be the judge as to which measures most accurately portray the consumer mindset.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900