U.S. stocks shook off some early weakness – pressured by a down European session – as just about all major indices closed higher.  The broad S&P 500 ended fractionally higher and the NASDAQ Composite, mid and small cap stocks recorded meaningful gains.  The Dow Jones Industrial Average was the only major to close down as shares of Chevron, Coca-Cola and Walt Disney weighed on the measure.

Basic materials and financials led the broad market to its slight increase.  Energy and consumer staples were the biggest losers.

Again, the mostly positive session for stocks failed to show up in the Treasury market as the curve flattened out with the 10 and 30-year maturities rallying the hardest (yields down with the former back to 1.90% and the latter to 2.97%).  It had more of a feel of gaming expectations that the Fed will come in with more bond buying than a fear trade though.

The commodity complex gave back half of the prior session’s gain.  About half of the CRB components rose in price, with big gains in coffee, aluminum and nickel.  However, OJ erased the previous day’s 9.7% upshot by sliding 11.6% after regulators hiked margin requirements for fear supply problems would cause a further price spike.  Crude also eased back to $101/bbl.

European stock indices fell yesterday but key sovereign bond yields improved (not so much on the spread side as German bunds also rallied, but strictly on a non-relative basis) as German Chancellor Merkel stated she’s ready to inject more capital into the ESM (long-term bailout fund).  Reality is the ESM isn’t going to save Europe from its debt problems, but short-term “fixes” work on occasion these days.

This morning ECB President Draghi decided to keep the central bank’s benchmark interest rate unchanged after two months of easing it back down to 1.00%.  It appears that’s where he wants to draw the line as his emergency level, if possible – unwilling for now to go full Bernanke and bring ZIRP to Europe.  His comments this morning are helping the markets, particularly his statement that sovereign bond yields have stabilized.  And so long as the ECB is willing to buy billion of euros of this debt, then those rates are unlikely to soar to where the market would otherwise take them.

Sector Activity for January 11, 2012

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose 4.5% for the week ended January 6 after declining by 4.1% in the previous week.  The average contract rate on the 30-year mortgage inched up to 4.11% from the 4.07% in the prior week.

Both purchase and refinancing apps gained ground, but for the purchases side the 8.1% pickup wasn’t enough to erase the 9.6% slide in the week before – this does at least end a four-week stretch of decline.  Refinancing activity did fully offset its prior week’s loss with a 3.3% gain.

Beige Book

The Fed’s report on economic conditions within its 12 districts, released every six weeks, illustrated that economic activity improved in an overall sense with limited hiring and housing still stagnant.   Eleven of the districts stated that activity expanded at a “low to moderate” pace, with the St. Louis region reporting the only decline in activity – that’s nice.

To Summarize:

* Consumer spending was favorable in most districts due to holiday shopping, with auto sales continuing along their upward trend.

* Manufacturing activity expanded in most districts relative to the previous six-week period as auto, energy and agriculture-related industries drove production.

* Residential real estate markets largely held steady at very low levels, with construction of multifamily units mainly driving construction activity.  Inventories of distressed properties along with weak sales results kept prices restrained.  Nonresidential real estate remained somewhat soft overall, with vacancy rates unchanged from the previous report.

* Lending activity edged up overall.  Most districts reported little or no change in overall loan demand, but the others reported increases rather than decreases.

* Agriculture was strong with farm income at very high levels.

* The combination of limited permanent hiring and numerous active job seekers has kept a lid on wages.  Although, the bright spots were the skilled labor industries of energy and technology where labor supply was constrained and large compensation increases were present.

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Have a great day

Brent Vondera, Senior Analyst

Phone: 636-449-4900