U.S. stocks, as measured by the S&P 500, rallied for the first session in five and booked the best gain in 10 sessions.  A nice bounce in European equity markets along with a better-than-expected factory report out of China helped to spark economic optimism.  There was also early speculation that Greece was closing in on finalizing their “voluntary” default, but later an EU official stated a deal was “days” – instead of “hours” – away.  We’ve heard that one before, which may be why stocks lost a little steam near the close.

Financials, industrials and basic materials led the rally.  Consumer discretionary, utilities and energy were the laggards – but all of the 10 major industry groups did finish higher.

The advance among European bourses marks the second-straight session of gain and the fourth in the past six.   The latest manufacturing number out of Germany helped to keep the optimism alive; although it remains in contraction mode (it merely beat expectations).  The latest factory gauge out of China also helped, as that figure rose to 50.5 (second-straight month of expansion).  However, this was the Chinese government’s number.  The alternative measure on factory activity from HSBC remained in contraction territory.

Despite the move in stocks, the commodity complex lost some ground as about half of the CRB Index’s components fell in price.  The energy trade was mixed with gasoline up a smidge and crude down $1/barrel to $97.45.

The weekly energy report showed a larger-than-expected build in oil inventories as gasoline consumption fell to the lowest level since the week following the 9/11 attacks.  Total fuel demand slid 8.3% last week to the lowest level since 1999 – part of that may be due to warmer weather, but this hardly explains it all away, particularly the multi-week slides in gasoline and diesel consumption.  (So the market supposedly rallied on better economic prospects, but gasoline and diesel demand shows quite the opposite.)

Market Activity for February 1, 2012

Sector Activity for February 1, 2012

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fizzled again, down two weeks in a row and four of the past seven.

The purchases side of the index slipped 1.7% after the 5.4% decline in the prior week.  It looked like we may just be on to something a couple of weeks back after the measure advanced nicely for two weeks in a row. However, even with the average contract rate on the 30-year mortgage at 4.09% we can’t keep it going.  I entitled the May 19, 2011 note “When 4.60% Doesn’t Help.”  Well, now the 30-year fixed rate is very close to going sub-4.00% and still housing remains in its morass.  It’s because there are other issues weighing on the market – such as: high joblessness and underwater mortgages that impede transactions.

Refinancing apps also fell, down 3.6% last week – also the second-straight decline.

ADP Employment Change

The preliminary jobs survey from payroll outsourcing firm Automatic Data Processing suggests that private-sector payrolls rose 170,000 in January – pretty much in line with expectations for tomorrow’s official results.  The December number was revised down by 33,000 to 292,000.  That was probably due to the temporary FedEx and UPS positions that overstated the initial December number – it should be interesting to see if this shows up in tomorrow’s report.

The average of these two numbers is a good result, if they actually showed up in the official data – ADP has been overstating job growth since June.

Service-providing sectors increased payrolls by 152,000 in January, according to ADP, with employment in goods-producing sectors up 18,000 – manufacturing accounted for 10K of this increase, which is a nice result.

ISM Manufacturing

Much like Tuesday’s Chicago PMI reading showed, the ISM print for January suggests that factory activity continued to expand last month.  Also like the reading out of Chicago, the number missed expectations, but remained at a good level.

The Institute for Supply Management’s gauge of manufacturing activity for the nation rose to a reading of 54.1 (shy of the 54.5 expected) for January.  The December reading was revised down to 53.1 from the 53.9 initially posted.  These are good solid numbers, as it is a couple of points higher than the long-run average – and a number above 50 marks expansion.

The internals of the report showed that nothing funny was going on as the rise in the headline figure is for real.  New orders rose to 57.6 from the 54.8 in December; backlog of orders rose to expansion mode for the first time since May; employment slipped but held the 54 handle; and new exports gained two points to 55.0.

The only component that remained in contraction mode was inventories.  This does show factories remain hesitant to expand stockpiles even as new orders book solid-to-strong results.  However, so long as those orders keep up, factories will be forced to produce and boost those inventories over time.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900