U.S. stocks looked to extend upon Wednesday’s Bernanke rally yesterday, but just as the Dow Industrials hit a new multi-year high (going back to May 2008) the selling ensued.  The reversal happened to take place right as the December new-home sales hit (specifics on that data beyond the click).  I’m not convinced the sell off was a result of that data missing expectations; the new-home market is in such tatters, residential construction doesn’t affect GDP in any meaningful way no matter which direction it goes, but the two events did occur simultaneously.

The utility space was the only of the main sectors to gain ground for the session – benefiting from both the relatively high dividend yields the group provides and its traditional role of safety.  Energy, telecoms and financials were the biggest losers.

The reversal in stocks didn’t have the same effect on the commodity trade as that area held onto some if its early gains.  Stocks certainly like ZIRP and QE, but such monetary actions push traders into the commodity complex with greater zest.  And this is a problem now that we’re at these levels on crude and gasoline.

Crude did give back some of it early gains to settle at roughly $100/bbl yesterday.  However gasoline held onto most if its gains to the close.  At $2.86/gal on wholesale prices and $3.40 at the pump (national average), the Fed better be very careful as $3.75-$4.00 retail level will have the same effect on GDP that it had during the first-half of 2011 – that is, sub-1.00% growth.

Market Activity for January 26, 2012

Sector Activity for January 26, 2012

Durable Goods Orders

Durable goods orders rebounded nicely in December from the disappointing results of November.  The headline reading showed a 3.0% increase (expected at +2.0%) after the 4.3% rise in November.  (That was neither an improvement nor was the November number weak, but serious people don’t pay much attention to the headline figure as it is skewed by the very volatile commercial aircraft orders.)   The more important figure excludes transportation orders, and that number rebounded to a 2.1% increase (blowing away the 0.9% rise that was expected), which follows the 0.5% increase in November.

And another important aspect of the report, non-defense capital goods ex-aircraft, also showed a nice rebound.  This figure, which is a proxy for business spending on equipment and software, rallied 2.9% in December after the 1.2% decline in the prior month.

That business spending number is an important one for GDP (particularly now as it’s been depended upon to make up for weaker consumer activity).  While it bounced nicely last month, it’s up only 3.0% at an annual rate for the fourth quarter.  That’s down from 9-10% rates in the previous two quarters and isn’t going to help Q4 GDP much as a result.

However, that durable goods ex-transportation figure (which is part of the personal consumption figure within GDP) will add nicely to growth.  I’m still looking for a 2.5%-2.7% (below the 3.0% expected) print for Q4 GDP as inventory and trade will weigh on the number.  We get the first look as Q4 growth this morning.  Then two revisions will follow over the next couple of months.

Jobless Claims

The Labor Department reported that initial jobless claims jumped 21,000 to 377,000 last week (expected at 370K), which unless next week’s result shows a large decline pretty much erases the expectation that these claims are on pace to a healthy level (initial claims generally run at 325,000-350,000 at this point in the cycle).   The number follows another upwardly revised result to the previous week’s reading.

The four-week average fell by 2,500 to 377,500.  However, unless we see a move back to 355K-360K next week this rolling four-week average will rise again.

Continuing claims (those on bennies for two week or more) were mixed as the standard issue rose 88,000 to 3.554 million, while emergency claims fell 145,000.  (The standard issue of claims covers the first 26 weeks of joblessness; the emergency claims take over from there to extend out to 99 weeks).

With the bump in standard claims, it’s tough to believe that the decline in emergency claims resulted from the bulk of these people finding jobs.  It’s more likely that their benefits simply ran out, which is what the long-term unemployment figures within the monthly labor reports would also suggest.

New Home Sales

And then the Commerce Department reported that new-home sales fell 2.2% in December to 307,000 units at a seasonally-adjusted annual rate (SAAR) after advancing 2.3%, or 314,000 units SAAR.  The December results were expected to rise 1.9%.

Still, the inventory data looks good as the number of homes available for sale fell another 1,000 to 157,000 units.

This kept the months worth of supply figure from rising too much even as sales declined.  That figure ticked up to 6.1 months worth of supply (based on the current sales rate) from the 6.0 months worth in November.   This is a healthy number – in line with the long-term average – but remember that the existing-home market has a glut of supply when one factors in the shadow inventory and that has an adverse effect on new-home sales.

The median price of a new home fell 2.5% in December to $210,300.  That’s down 12.8% over the past year and 20% from the 2007 peak.  Home builders may very well need to lower selling prices yet more (especially if they think they’re going to begin to ramp up construction) as they must compete with the distressed-property prices (via foreclosure) within the existing-home market.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900