U.S. stocks spiked yesterday as a number of central banks, obviously spooked that something ugly was about to occur, agreed to take action to prevent the European banking system from crumbling as they reduced the interest rate on dollar liquidity swaps.  China was also in the game, they actually acted first, by easing credit conditions as their economy slows.

The Dow Industrials super-balled 490 points, which was quite the reversal as futures were meaningfully lower Tuesday night after EU officials failed to leverage the EFSF by what was seen at a minimally required €1 trillion.

Gosh, this is all so very bullish I’m beside myself.  We still need unprecedentedly aggressive actions by governments as economic growth deteriorates again and European bank funding markets dry up.  The global economy can’t get out of its assisted living facility now more than three years after the crisis began, and stocks jump on the news?   Look, I certainly want stocks to rise as badly as everyone else does, but I want it to occur for the right reasons – otherwise up, down and essentially nowhere continues (and hopefully it’s just nowhere instead of below where).

Now, we did get a good number out of the ADP employment survey and a stellar Chicago manufacturing report – which we touch on below – but the pre-market surge was completely underway before that data came out.  I watched the European bourses immediately jump from trading flat to up 3.5%-4% across the board immediately after the announcement from the central banks, so markets that were officially open also showed that the bounce was all about that assistance.

Financials led the broad market higher, followed by basic materials and energy (crude back above $100/bbl).  Consumer staples, utilities and consumer discretionary were the laggards.

More on the specifics of what occurred yesterday below…

Market Activity for November 30, 2011

Sector Activity for November 30, 2011

So the decision by the Chinese government to reduce RRR (the reserve requirement ratio for their banks, which allows them to hold less capital and push more funds out the door) kick started the rally in pre-market trading. China had been in the process of increasing this ratio, and they got a bit aggressive in increasing reserve requirements early in the year as they worried that too many loans were going bad and inflation had hit 6.6%.  So this latest move to begin reversing that policy illustrates that they’ve got larger worries on their hands.

Then, not to be outdone, a number of central banks coordinated to open dollar swap lines yet wider – while six central banks were involved (Bank of England, Canada, Japan, Swiss, the ECB and our Fed), it’s really Bernanke & Co. that’s providing the liquidity.  This action is being taken because the U.S. dollar funding markets (used to fund dollar loans) within the European banking system had dried up due to counterparty risk.  The rumor was a large bank, likely French, was on the verge of collapse Tuesday night.  My view is a collapse wasn’t quite that imminent but rather Bernanke and Draghi saw the real possibility that a few banks would fail sometime over the next few weeks.  The European banking system looks like ours did in 2008, which we’ve been talking about for some time now.

Preliminary Jobs Reports

As with every Wednesday before the official monthly jobs report is released on the first Friday of the month, we got the Challenger Jobs Cuts Survey and the ADP Employment Change report.

The Challenger survey showed that announced job cuts fell slightly relative to the previous month, down just 285 to 42,474 in November.  Announced job cuts thus far for 2011 have surpassed the number for all of 2010, and with another month to go.

On the more optimistic side, the ADP report estimated that private-sector payrolls increased 206,000 in November (which beat the 130K increase that was expected, but just barely when factoring in that UPS hired 55K seasonal workers).  The October reading was revised up to show a 130K increase instead of the 110K previously estimated.

According to ADP, service-sector payrolls rose 178K (again, with 55k coming from UPS seasonal hiring) and goods-producing sectors hiring 28K (7K via manufacturing and 16K via construction).

So this is a good relative report from ADP (and adjusted for the temp workers UPS hired, it’s still a decent report).  While ADP has a history of overstating results for November, I expect the official jobs report on Friday will post a decent number (maybe close to 200K as initial jobless claims trended lower for the month).

But remember, we need 300K/month in payroll growth for as far as the eye can see just to chip away at the jobless rate.  This level of job growth would be enough to absorb the 125K persons/month in population growth and the five-million people that must re-enter the workforce just to get the participation rate back to the modern-era average.

Chicago PMI

The latest Chicago Purchasing Managers Index showed that factory activity within that region posted strong results in November – so Chicago continues to show that activity in the upper Midwest is much stronger than other regionals (Philly, New York, Richmond and Dallas continue to post depressing results).

Production printed 67.3, up four points from October and the highest level since April; new orders surged to 70.2 from 61.3 in October; backlog of orders rose four points to 55.1.  However, the employment reading fell six points to 56.9, but the report on the whole was a very good one.

Now, what I would caution against is putting too much credence in Chicago as the other regionals remain weak and the nationwide ISM survey is lower too.  When Chicago and ISM diverge, as has occurred again of late (see chart below), they eventually converge again and it always occurs with Chicago going down to meet ISM rather than the other way around.  We get the November ISM this morning at 9:00 STL time.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900