Trading appeared to be especially bifurcated (in terms of what traders focused on in the morning and afternoon sessions) on Tuesday, but while the attention on news items was different the activity and direction of the market was pretty much a mirror image. 

Major indices began the session meaningfully higher yesterday after the latest EFSF auction went well, but lost steam as the morning went on after it was reported that Germany rejected plans to increase funding of the ESM (the long-term bailout fund, which takes over for the EFSF, or the short-term bailout fund).   

For the afternoon session, trading mostly focused on the FOMC meeting that was taking place, expecting something market-juicing in the statement that followed.  In front of that statement, stocks rallied (just as the morning session began), but those gains were quickly erased following release of the text. 

That statement was mostly unchanged from the previous issue six weeks ago, most importantly keeping the “significant downside risks” phrase in that text, which offers that a completely dovish Fed in 2012 (recall we’ve talked about the yearly rotation of members will leave the entire Committee dovish) will be itching to roll out QE3 early next year.  Where the statement differed was via a more negative tone regarding business spending.  It may have been that more negative tone, absent a corresponding announcement of more QE to come, that caused the second-half rally to fizzle.  (Although, I’m not sure I totally buy that one as the very negative tone is a signal in itself of more QE to come, we should know this by now.) 

A market that expects, and even demands, a backstop from the Fed didn’t appreciate the fact that Bernanke & Co. refrained from saying something more explicit.  The minutes (which are released three weeks later) may reveal more, such as a move to targeting NGDP.  That is, the FOMC moving toward making an explicit statement that ZIRP will remain in place until nominal GDP is running, at say, 6% for several quarters – we’ve averaged 4% during this recovery/expansion, with more than half of that rate coming from the inflation side over the past three quarters. 

More beyond the click…

Market Activity for December 13, 2011

Sector Activity for December 13, 2011

Certainly also playing a role in the market’s behavior was news that Iran shut the Strait of Hormuz for military exercises.   An Iranian official stated that the strait was not blocked, besides that Iran would temporarily close the pass for military exercises was a known as of Monday anyway.  It still incited a move in oil though, which spiked to $101.25/bbl (it had opened at $97.80), but it quickly chilled back to $99.85 before closing at $100.14 – this morning crude is trading lower to $98.56.

And then we have the Treasury market, in which the longer-end of the curve rallied even after beginning the day lower (prices lower/yields higher).  It was an awesome 10-year auction that got the rally kicked off as everybody wants some of 2.00% for a decade – a huge bid-to-cover of 3.53 (second-highest gauge of demand ever). 

Well, maybe it’s about more than simply everybody wantin’ some of that 2.00%.  It’s more a function of traders gaming the Fed.  Remember that Operation Twist the Fed launched back in September meant they’ll be concentrating purchases toward the longer-term of the T market.  In addition, bond traders surely expect Bernanke will be coming with more buying next year (the rally extended after the Fed statement was released).  Surely too, the demand was function of money running from Europe and into the relative safety of the T market. 

NFIB Small Business Confidence

The National Federation of Independent Business’s gauge of small business sentiment gained 1.8 points to print 92.0 for November.  This marks the second-straight month of improvement after five-straight monthly declines that sent the measure back to a level seen in only deep recessions – but that was before this current epoch (we’ve been below a reading of 95 for longer than any time in the survey’s 37-year history). 

So nearly every component of the measure improved in November.  The plans to hire, increase capital spending, expect a better economy, and a good time to expand segments of the survey all increased – although as the chart of the overall index illustrates, they remain below normal levels. 

The two components that deteriorated were inventory satisfaction and positive earnings trends.  Both of these are current-situation gauges and show that small business managers continue to remain very cautious for probably a variety of reasons. 

Retail Sales

November retail sales came in shy of expectations as they increased 0.2% (+0.6% was expected) off of an upwardly revised 0.6% increase for October.

This is a pretty weak print for a Christmas shopping month, although it was probably better than the headline figure illustrated.  For instance, auto sales advanced 0.5%; furniture rose 0.4%; electronic sales jumped 2.1%; clothing was up 0.5%; and internet shopping gained 1.5%.  These figures have holiday shopping written all over them. 

But these nice gains were not enough to offset other areas of weakness that resulted in the overall 0.2% print. And due to this latest print and the 0.6% for October, retail sales are tracking at just half the rate of the previous quarter.  We’ll wait for December to see how it affects the quarter, but it doesn’t look like the largest component of GDP (personal consumption) is going to help much. 

Business Inventories

Business inventories rose 0.8% in October (right in line with the expectation), getting the quarter off to a good start with regard to the segment boosting GDP.  We still need to see the November number before we make any guesses, but I’d assume since inventories weighed on GDP in the previous three quarters that there will be some rebuilding to help GDP in the fourth quarter. 

And for that matter, look for trade to help too along with business spending (although it started on a weak note as the October number declined) as firms will look to spend more to take advantage of the higher current-year depreciation allowance that expires at year end.  But they’ll have to be good to more than offset what looks to be weak consumerism. 

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Have a great day!

Brent Vondera, Senior Analyst