U.S. stocks bucked another day of selling in euroland as a very strong preliminary jobs report from ADP inspired traders.  Not all domestic indices gained ground though as the Dow Jones Industrial Average was weighed down by the shares of Chevron, IBM and Boeing.

Financials, consumer discretionary and tech led the S&P 500 higher.  Energy was the biggest laggard (oh my, crude fell to $101.76/bbl – energy companies can’t make money at that price).  Telecoms and consumer staples also sold off.

European bourses have largely erased the gains recorded in their first two sessions of the year as they converge with euro-zone bond markets – markets that have been selling off for several sessions now.  Alas, problems on that continent are not going away simply because the Fed and ECB have attempted to suspend the reality of a serious debt problem combined with a lack of GDP growth.

To wit, French, Italian and Spanish interest-rates are in the process of a re-backup (prices down/yields up); the latest tranche of the Greek bailout is in the process of delay; and Hungary looks to be the next trigger point.

Hungary is certainly in a world of hurt with two failed auctions in the span of a week.  The yield on their one-year bills has jumped to an unsustainable 9.96% – it traded at 5.6% just three months back (and these short-term yields are extremely important as refunding for the most troubled governments in Europe are dangerously tilted to short-term maturities; hence, the refinancing issues just keep popping up).

But the biggest problem for that euro-zone member is it won’t be able to count on the ECB saving it from a refinancing predicament via bond purchases.  That government defied ECB/IMF demands (a new laws seek to reduce that central bank’s independence; but please, like the ECB or the Fed are independent from their Treasury Departments as they buy government bonds with abandon – the hypocrisy is stunning).  Anyway, the bottom line is there are so many time bombs sitting in Europe just waiting to go off, no one can know which one will trigger something truly nasty over there.  Maybe it’s an unsuspecting Hungary.

Market Activity for January 5, 2012

Sector Activity for January 5, 2012

Preliminary Jobs Reports

So we’ve got these preliminary jobs reports of which most readers are aware.  The first is the Challenger Job Cuts report for December, which showed an increase in announced firings of 30.6% compared to the year-ago period – 41,785 layoffs were announced as opposed to the 32,004 in December 2010.  Roughly 40% of the cuts came within the East region, certainly a function of all those financial-sector layoffs as banks find profits sinking again.  Even as they release loan-loss reserves (an action that boosts the bottom line), bank profits are on pace to decline 18% for 2011, according to Bloomberg.

But then we received the ADP Employment Change report, which showed a large 325,000 increase in private-sector payrolls for December, coming off of the 204K pick up in November and whipping the expectation for a 178K increase.

Now, it is December, which is a good month particularly from the retail side of things.  But this marks the second-straight month over 200K and the first 300K-plus print in the measure’s 10-year history.  The report even estimated that goods-producing sectors added 52,000 positions – 22K coming from manufacturing and a 26K increase in construction.  That makes it two up months in a row for construction (first time since the sector began eliminating 2.1 million positions in 2007).  Now let’s see it show up in the official data, which we get tomorrow.

Jobless Claims

Initial jobless claims fell for the fourth time in five weeks (for the week ended December 31), down 15,000 to 372,000.

Of course, the prior week’s number was revised up, as we’ve seen about 90% of the time over the past couple of years.  That prior reading was revised to 387K instead of the 381K previously stated.   Initial claims have net increased over the past two weeks, but they remain at a decent level – at least we’ve held below that 400K mark for five-straight weeks.  Yes, it would be nice to see initials settle in at the 325-350k range, levels that represents a normal job recovery, but let’s not get carried away as nothing is normal about this economic situation.

The four-week average fell 3,250 to 372,000.

Continuing claims were also revised higher for the previous reporting week, by 16,000.  However, they did decline 17,000 in this latest week – unless they too are revised higher.

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity remained in expansion mode for December, ticking up to 52.6 from the 52.0 in November – missing the expectation by a touch as that was for a rise to 53.0.  (A number above 50 marks expansion; the average reading, going back to 1997 when the measure was created, is 53.8).

The internals were biased to the negative side (it was a large 6.5-point increase in the imports segment that was responsible for a better headline number).  New orders inched up to 53.2 from 53.0, but backlog of orders, employment (contrary to the good ADP number on service-sector payrolls) and inventories all remained in contraction mode.  That inventories were in contraction mode wouldn’t necessarily be in a bad thing if the inventory sentiment number weren’t so high at 59.5 – a number above 50 means that respondents believe their stockpile levels are too high.  Thus, it’s unlikely there will be an increase in production to boost those levels over the coming months.)

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900