U.S. stocks were largely able to buck weakness in Europe (a selloff that wiped out much of the prior two-session bounce), as a late-session rally in the Dow Industrials and S&P 500 recovered morning losses.  The NASDAQ along with mid and small-cap indices weren’t able to fully recover.

Yesterday’s winners were consumer discretionary, basic materials and industrials.  Of the 10 major industry groups, basic materials are off to the best start this year as it appears traders are positioning toward more Fed easing.   Energy also managed to post gains as crude extended upon Tuesday’s big move.  The losers were health care, telecoms and utilities – two of which were among 2011’s top performers, so we’ve got some profit taking going on there.

As stated, energy prices continued to bounce off of the nine-month lows hit in November – a decline in oil and gasoline prices that had resulted in a sort of income boost to the consumer; although that’s not an entirely accurate description as that low was still 10% higher than the year-ago period.  Still, one can argue that it did result in at least a temporary amelioration to the pocket book.  But now that temporary benefit appears to be in the process of being removed as crude is back to $103/bbl and wholesale gasoline is up 34 cents in little more than a month.   (I also think it gets lost among many people that the spend down in the savings rate was the primary factor in helping the holiday shopping season.  That cash savings rate slid from 5.0% to 3.5% in a five-month period, which was good for $175 billion.  Problem is, it is not a recurring boost to consumer expenditures.)

Back to those European markets, French and Spanish interest-rate spreads are back on the rise as OATS (longer-term French sovereigns) have sold off for seven-straight sessions and Spanish for four.  (Just to refresh everyone’s memory, those spreads blew out to record wides back in November, until the Fed came in with their dollar swap program and the ECB with their LTRO – a lending facility that allowed banks to borrow from the central bank for an unprecedented three years on equally unprecedented acceptance of suspect collateral.  Central banks can suspend reality, but not into perpetuity.)   Continued beyond the click…

Market Activity for January 4, 2012

Sector Activity for January 4, 2012

That Spanish 10-year yield is back to 5.57% -- up 49 basis points in four days.  The Italian 10-year is back above that 7% threshold -- a level that if sustained cannot be easily managed around as the Italian economy has averaged just 1.0% GDP for 20 years now.  OATs do remain at very manageable levels (3.34% on their 10-year), but the spread over German bunds shows clear that the market has returned to price in a credit-rating downgrade for one of the eurozone’s few remaining AAA credits.

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell 4.1% last week as apps to purchase a home fell 9.6% and refinancing apps slipped 2.5%.

The total index is up 38.4% from the year-ago level, but it’s all due to refinancing activity (up 63.0% over the past year); purchase apps are down 17.9% over the last 12 months.  Thus, record low interest rates (down to 4.07% on the 30-year fixed as of last week), have failed to inspire more buying.  This is exactly why the Fed, via the next round of QE, will work to narrow the spread between the commitment rate and the rate that consumer pay in the marketplace.

Factory Orders

The Commerce Department reported that November factory orders rose 1.8% after contracting by 0.2% for October (revised up from the previously reported 0.4% decline).

The thing we really look for within this report is the durable goods orders as these factory orders figures show the revisions to that durables report that is released two week prior.  It showed no real revision, the top-line durables orders rose 3.7% instead of the 3.8% reported two weeks back, but the ex-transportation reading (important to concentrate on as it excludes the volatile commercial aircraft component) was unchanged at +0.3% and the business spending proxy (technically referred to as nondefense capital goods ex-aircraft) was also unrevised at -1.2%.

This business spending number is concerning as it completes two-straight months of decline and brings the three-month average down to 3.6% at an annual rate – that’s down from the 8.0% in the third quarter and the 20.1% in the second.  The shipments of these orders (which is plugged into the GDP report) has weakened to +2.9% at an annual rate, down from the 17.3% in the third quarter.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900