U.S. stocks, as measured by the S&P 500, ended a three-session winning streak as traders faded the expected announcement that will follow this “time of reckoning” summit (although it’s up in the air whether it ends today or this weekend).  In addition, Draghi failed to feed the market it’s QE addiction, yet at least, as he remains reluctant to engage in a Bernanke-style bond-buying campaign.

Of course, it wouldn’t be a normal day without a rumor fest from the media – it’s like every reporting agency has been reduced to a tabloid.  The latest was a late-session report that EU ministers had come up with something big (such as combining the EFSF and ESM – the short and long-term bailout funds – and making ESM into a bank so that it can buy government bonds and then get loans from the ECB by using that debt as collateral) only for a German official to summarily state that the idea was rejected.  That sent the market to the session low.

Consumer staples, utilities and tech were the day’s relative winners.  Financials, basic materials and energy took the brunt of the damage.

So we got the latest rate decisions from the ECB and the Bank of England yesterday morning.  The Bank of England’s decision came first and they left their benchmark rate at what’s become their emergency level of 0.50% while keeping their bond-buying program unchanged at $432 billion (although they’ve talked of increasing that QE program).  Then came the ECB, which chose to cut its benchmark rate by 25 basis points to 1.00%, which is the emergency level for the ECB (I’m pretty sure the market was looking for a 50 basis point cut, but that will come by the next meeting based upon the bad situation euro-zone banks are in and that economy too – Draghi just didn’t want to do it all in one meeting).

More on this front and the day’s economic releases below, but first what we think we know coming out of this EU summit this morning is they’ll get the required 85% of EU member (23 of 27) to agree on fiscal rigors, or penalties for running deficits above 3% of GDP.  But to get there they had to settle for intergovernmental agreements because they reportedly couldn’t get the votes to change the Lisbon Treaty.  As a result, there’s a big question over just how binding any of this will be – remember, the Lisbon Treaty has these deficit constraints in it but they were simply ignored.  The other question is since even Germany is running a deficit higher than 3% of GDP and Spain’s budget deficit is 9.3%, when exactly are they going to put these restraints in place?

Market Activity for December 8, 2011

Sector Activity for December 8, 2011

Back to the ECB though, while Draghi rejected a Bernanke-style QE he did pledge to offer banks unlimited cash for up to three years (that’s a very long time for central bank loans) and lowered yet again collateral quality requirements (this move is another obvious sign the banking system is in a world of hurt).  But the market doesn’t care about those things as much as it does a signal that Draghi will be overcome by the spirit of Bernanke and more aggressively buy government bonds – a market juicing strategy that traders have come to rely upon.

Jobless Claims

The Labor Department reported that initial jobless claims fell 23,000 to 381,000 after the previous week’s reading was revised up yet again (but only by 2K to 404K).  The good news is that 381K is low enough so that even as it gets revised up next week it should remain below 390K.

This is the best initial claims reading since February when the figure fell to 375K, before ramping higher again.  This time, let’s hope the slide continues and we need to get that 350K level that will signal we’ve got something close to the monthly job growth this economy desperately needs.

The four-week average fell 3,000 to 393,250.

Continuing claims slid as the standard issue (covering the first 26 weeks of joblessness) collapsed by 174K to 3.583 million and emergency claims by even more as they dropped 212K to 3.309 million.  Even if these numbers are revised higher (as last week’s were, and has become the norm) this decline is so great that it won’t make much difference.  Total continuing claims have finally dropped below seven million, down to 6.892 million – still sky high, but great improvement.

The question here is whether this can continue beyond the holiday shopping season as retailers move from seasonal hiring to seasonal firing.  These claims numbers are seasonally adjusted, but the shopping season has another week in it this year, so maybe that disrupted the adjustment process.  We’ll find out when we get the December jobs report because if these claims are being measured correctly then there’ll be a big jump in payrolls.

Bloomberg Consumer Confidence

Bloomberg’s gauge of consumer confidence (the old ABC confidence reading that goes back to 1985) pretty much held at the level it has been running at for a month now as it came in at -50.3, down just a touch (expected to rise to -49.3).

Respondents’ view of the state of the economy deteriorated slightly, falling back to the level hit at the early 2009 depths…

…as did the buying climate, falling three points, but remains well above the 2009 lows.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900