U.S. stocks opened the week lower yesterday, but did manage to erase much of the morning-session weakness by the close.  The major indices hit the session’s low about 40 minutes into trading, pressured by another weak personal spending report and yet another weekend that’s passed without a deal on the Greek default.  However, traders quickly remembered that Bernanke’s got their back (along with the ECB) and the market was able to climb that wall of worry, closing near the session’s high mark.

I should note that that personal spending report wasn’t all bad as it also involved income results for the month (we get into the specifics beyond the click), which posted an advance that beat expectations.  But the market cares mostly about the here and now, and better income figures don’t drive the excitement that the spending side can, even if the outlays are at times reckless in nature.  I can assure you that Bernanke doesn’t care so much to see income growth catch up to spending activity either, but such is the tendency of the Keynesian mindset – a world that views things only from the demand side.  But sorry, after the spending binge consumers had been on for several years (using their homes as an ATM via cash-out refis, running up credit cards and using NINJA (no income, no jobs, no assets) loans to buy cars, we’re going to need incomes to outpace spending for a spell.  We all want to get back to a normal growth environment and this is one of the necessary conditions to getting there.

Telecoms, tech and basic materials were the day’s out-performing sectors.  Financials, utilities and consumer staples were the day’s biggest losers.

The commodity complex slipped for the first session in six as 18 of the 19 components within the CRB Index declined in price – nickel being the only commodity to close higher.  For those we watch most, crude fell back to $99/bbl and wholesale gasoline dropped nearly six cents to $2.87/gal – although both are powering higher this morning along with stock-index futures.

The Treasury market has caught fire again over the past four sessions.  The latest round of weak economic figures sparked this rally (beginning with jobless claims and new homes sales, followed by that GDP report and now the spending figure), as the yield on the 10-year slid back (yield down/price up) 1.84% -- it touched 2.06% a week ago.  The 30-year rallied back to 2.99% after the 3.13% it had sold off to a week back.  The 5-year hit a new high, pushing the yield down to 0.73%.  Isn’t that special.

Market Activity for January 30, 2012

Sector Activity for January 30, 2012

Personal Income & Spending

The Commerce Department reported that personal income rose 0.5% in December (besting the +0.4% that was expected) and completes the best quarter for pre-tax income since the first three months of the year.  Adjusting for taxes, incomes rose 0.4% after no change in November.    This figure is down 0.1% over the past year when adjusting for inflation.

Driving incomes higher was the vital wages & salaries component, which showed an increase of 0.4% -- manufacturing posted a 1.1% gain, with service-providing income up 0.4%.  Rental income also continues to help, up 1.9% for the month and 23% year-over-year.   And government assistance also helped, up 0.6% in December.  Government transfer payments have accounted for an outsized 18% of total income since 2009, the long-run average is 13%.

Proprietors’ income weighed on the overall figure as farm-related income has taken a turn for the worse – down 8% in December and sliding 60% at an annual pace over the past three months (and no, that’s not a typo).

On the other side of the ledger, personal spending was unchanged (0.0%) – it was expected to rise 0.1%.  This followed scant increases of 0.1% in each of the preceding months.  Thus, while income growth looked good for the quarter, spending was pretty flat.

Frankly, for an economy that’s dealing with a massive debt issue, I think this is great news.  Short-term stock traders feel differently, however.  (Fact is, we need incomes to outpace spending for a number of consecutive quarters.  Sure that will weigh on GDP, but it will also provide the way for future growth as the debt pay down process will accelerate.)

And on that topic, the cash savings rate recorded it first real improvement in six months.  Consumers have been spending down their savings to keep even the lackluster activity of the past year going and it was only a matter of time before that began to turn again.  As a percentage of disposable income, cash savings rose to 4.0% from the 3.5% in November.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900