U.S. stocks gained ground to start off the holiday-shortened week, inspired by a better-than-expected GDP report out of China and a two-session upswing in European markets.   The morning-session gains put the S&P 500 briefly over the 1300 mark – a level not seen since the late-July slide began.  However, afternoon weakness set in – largely due to financials going negative – and the broad market was unable to fully erase Friday’s losses as a result.

Maybe helping the markets more than anything was the speculation that the ECB has another trick up its sleeve – an even larger LTRO for February (LTRO being that €500 billion three-year lending facility the ECB extended to the banks back in December).  Word is the next ECB cash delivery will be €1 trillion or more, probably to avoid any liquidity crunch due to the fact that Portuguese bonds held on bank balance sheets are now trading at junk status and Fitch is claiming Greece will default, the hard way, in March.  (I still doubt that one, but the soft default won’t be pretty for owners of Greek bonds either).    The ECB is going all in.  In fact, every major central bank is either all in, or getting there.

In any event, Europe has traded fabulously over the past couple of sessions considering the credit ratings downgrades, the heightened probability that Greece and Portugal will exit the zone and the continent’s overall economic woes.  Those equity markets have rallied for two-straight sessions and most of the bond markets have as well – French, Italian and Spanish sovereign yields have come down nicely again.  (Although, the next test comes later this week as the auctions over the past couple of days have been for short-term bills – and the ECB’s LTRO makes those bill auctions as easy sell.).

But as we touched on Tuesday morning, Portuguese bonds have blown out after they were cut to junk status.  They’ve widened to point-of-no-return levels.  Such things occur when your credit rating falls below investment grade, but it’s still surprising that the ECB hasn’t thrown them some kind of lifeline considering the other garbage Draghi & Co. are willing to accept as collateral.   So despite the scares out of Italy, Spain and Hungary of the recent past, it’s becoming more evident by the day that Greece and Portugal may just be the ultimate triggers that send the eurozone into a spiral.  What’s old is new again I suppose.

It’s too bad we can’t just get on with it instead of dragging this thing out.  That Greece and Portugal exit the eurozone doesn’t mean death to financial markets, even if some removals will cause markets to temporarily swoon.  The fact is it’s inevitable to creating a more stable zone.  More beyond the click…

Market Activity for January 17, 2012

Sector Activity for January 17, 2012

Oh, and we also had that Chinese GDP number for the fourth quarter, beating expectations but posting the weakest result since the dark days of 2009.  Now, they still managed to grow at an 8.9% annual rate – according to that government.  But I do question this figure as it hardly jibes with the decline in European industrial orders (China is a huge export market for the eurozone).  German industrial orders alone have tanked at an 18% annualized rate over the past five months.

Empire Manufacturing

Well, here’s our first look at factory activity for January and it continues to rebound off of the third-quarter weakness.  Manufacturing activity out of the New York area, as measured by the Empire Manufacturing Survey, increased this month.  The figure rose to a reading of 13.48 (expected at 11.00) from the 8.19 in December – a nice bounce from the negative prints that ran June-October.

In terms of the sub-indices, new orders, inventories and the average workweek all posted very nice gains – inventories and average workweek rising from contraction mode in December.  However, delivery times and unfilled orders both posted contraction – the former falling to contraction and the latter improving but remaining negative.  (You want to see these two print positive results because increasing backlog of orders supports activity if new orders fall off and delivery times will slow – resulting in a more higher reading for that component – when activity is rolling.)

Overall, this first look at factory activity for 2012 appears to show that the expiration of that higher depreciation allowance hasn’t done any harm to production.

We’ll really have to wait to see the Fed’s industrial production report for January to know for sure (these regional factory surveys are simply measures of how many respondents stated activity increased relative to those saying activity slowed, and thus they are not absolute measures of production.)  This morning we get industrial production for December, which is expected rebound after posting flat-to-negative readings in two of the past three months.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900