Market Talk

Anyone betting that manufacturing will continue to lead the US economic recovery might think twice after reading comments from survey respondents in Dallas Fed’s April Texas manufacturing outlook.

Similar to Philly Fed’s gauge last week, Dallas headline number tanked, to 8.1 from 24.1 in March. The Philly survey’s headline number fell to 18.5 from 43.4 in March, but unlike the Dallas survey, Philly doesn’t include respondent comments in its report.

Down in Texas there’s a fair measure of cautious optimism among survey respondents, and plenty of concern about high costs and soft demand. Here’s one from a plastics and rubber products manufacturer that sounds pretty good:

“We are very encouraged by the breadth of activity with our cross section of customers in the Dallas–Fort Worth area. It is not just a few companies with increased requirements for plastic parts, but pretty much all of our diverse customer base.”

Now here’s one from the other end of the spectrum, a furniture/related product manufacturer: “Our industry has hit another brick wall. Rapidly increasing costs and fuel costs have shocked the consumer away from any nonmandatory spending. They normally adjust, but it may take several months.” Continue reading…

A dose of cautionary comments on three things that seem to only go up lately: the euro, stocks and corporate earnings.

First on the euro, which surged through $1.43 today its highest level vs USD since January 2010, and looks as if it’s left any and all concerns about sovereign debt in the dust.

Nomura says in a report that it’s too early for the euro to shed that risk. “The uncertainties about the economic outlook, debt dynamics, and the political framework around managing sovereign insolvency are simply too great,” firm says.

It estimates “a debt restructuring isolated to Greece/Ireland/Portugal would trigger direct and indirect losses around $240bn for core Eurozone banks, while bank losses would rise to $480bn in a restructuring including Spain.” German banks have the largest exposure to the periphery, Nomura says, with estimated losses of $185B in a restructuring scenario involving Spain.

Implied risk premium on the euro “has compressed significantly since January,” firm says, as the single currency “decoupled from sovereign risk.” That process “has probably run too far at this point: a persistent risk premium is still needed.”

On to stocks and some thoughts from BofA Merrill small-cap strategist Steve DeSanctis. He points out that weaker economic news, higher energy prices and disaster in Japan tripped up stocks in early March, but a “liquidity driven rebound” has put the Russell 2000 within 1% of its all-time high.

“Volatility came tumbling down despite the fact that none of the earlier concerns…have been resolved,” he writes, and small caps “are now very close to the full year’s return we have been expecting.” DeSanctis says he’s been “taken back by the strength of the overall equity market and in small caps in particular given the economic backdrop and where absolute and relative valuations stand,” and thinks 1Q earnings estimates are too high. Continue reading…

Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.

Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”

Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”

Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.

“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.”  Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.

Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”

If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.

The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.

The rally train rolls on as stocks open 2Q on a positive note, trudging higher but finishing well below session peaks.

Encouraging March employment report, ISM manufacturing generally as expected and decent auto sales prod markets higher. NY Fed’s Dudley also helps sentiment, countering recent hawkish tone from some Fed officials with market-reassuring dovish language of his own.

Again, volume not especially impressive, particularly considering the first day of a new month and quarter. Looked as if bulls might fade in final hour, but had enough kick to finish fine.

DJIA adds another 56.99 to 12376.72; earlier reached highest intraday level since early June 2008. Nasdaq Comp rises 8.53 to 2789.60, S&P 500 ends 6.58 higher at 1332.41.

Kind of quiet for economic data next week, FOMC minutes due out Tuesday could be interesting but not necessarily market moving. Otherwise, week’s peppered with some Fedspeak, expect them to continue guiding expectations toward a QE II finish in June and then no more.

Alcoa kicks off 1Q earnings reporting season a week from Monday, and commentary/outlooks from corporate America may serve as the next test for stocks. Can’t rely on Fed liquidity forever, eventually the investment story needs to come back to the pace of profit growth and margin expansion. Will executives have enough faith in the economy’s forward momentum to pick up hiring and capex, or will they stay cautious and focused on controlling costs in a wait-and-see mode?

(Photo courtesy of the Library of Congress)

Warm reception for the improvement in the March jobs report, and Dow Indutrials surge to a 2011 high. Good to see 216,000 jobs added, unemployment rate down a tick, but the report wasn’t without its flaws.

Labor force participation remains stuck at a low 64.2%, until recently a level last seen in 1982. Average hourly earnings for private employers actually fell 2c to $19.30 (though weekly pay ticked up). The number of long-term unemployed (out of work more than six months) rose, and now accounts for 45.5% of 13.5M out of work.

The stagnant wages may be the biggest drawback to this report. As Paul Ashworth at Capital Economics notes, job growth still isn’t strong enough to bring the unemployment rate down quickly, and if it only drops 0.1% per month, as it did in March, “it would take another three and a half years to get back down to the pre-recession level.” The still-high rate continues to tamp down wage inflation, with overall average hourly earnings flat for second-straight month, and annual growth rate remained at 1.7%, Ashworth points out. “In real terms, wages are falling.”

There was also a drop in the U-6 measure of underemployment, looks as if there’s fewer “discouraged” workers out there. However, based on the participation rate, it doesn’t look as if they all went from discouraged to back in the labor force, so it makes you wonder how many are just slipping off the radar screen altogether.

At the end of last week, we joked that “if the troubling headlines keep up, we could be back at all-time highs before Earth Day.” So far, so good –  the headlines are still dreary, and bulls are the ones laughing as stocks forge higher.

It remains a curious and impressive sight. An ugly March consumer confidence report, and another month of home-price declines indicating that even after prices started heading south nearly five years ago (and tens of billions of taxpayer money used for artificial support), housing still hasn’t found a bottom. And stocks rally.

Now, it’s true the downbeat numbers were in line with expectations, but that doesn’t mean they stink any less. And their implications for future activity, both for consumers and the housing industry, are grim.

Economists worked to minimize the consumer confidence tumble, saying it’s tied to high gas prices, events in the Mideast and market volatility, as if those troubles are set to disappear any day now. Consumers’ near-term outlook is considerably worse than a month ago, with fewer expecting business conditions to improve, fewer expecting their incomes to increase and fewer expecting to see more jobs. And those declines are all off of already low numbers. Continue reading…

Stocks had a strong week, bolting higher in a stout rebound after the sell-off instigated by Japan’s earthquake/tsunami/nuclear crisis nightmare. A nightmare that’s still ongoing, by the way.

Oil didn’t move much today, but energy stocks led the way, along with the material and industrial sectors. IBM, CAT, Chevron and Exxon Mobil account for almost 80% of the DJIA’s advance. DJIA rises 50 to 12220, Nasdaq Comp adds about 6 to 2743 and S&P 500 grinds out 4 to 1313.80.

What’s most impressive about the week’s gains is that they came amid a cascade of unpleasant headlines. Leaking radiation; European debt problems flaring up again; horrendous housing data; weak durable goods orders; another commitment by US military forces as civil war rages in Libya; spreading unrest in Middle East and North Africa; and oil prices marching higher. And of course, that air-traffic controller sound asleep in the DC tower. Horrifying. Continue reading…

Stocks may be shrugging off the swirl of unsettling global developments, but consumers don’t seem as breezy.

- The Fed is often accused of being behind the curve, and for good reason. Look at this headline that ran earlier on the broadtape, quoting Dallas Fed’s Richard Fisher:

*DJ Fisher: Sees Early Signs Of Unconstructive Market Speculation

Early signs? Take a look at a chart of any commodity or major stock index. Early signs of unconstructive speculation? And this comes from a guy who’s considered to be one of the FOMC’s biggest hawks. Good heavens. Here’s his quote, reported by Newswires’ Frances Robinson in Brussels:

“We have abundant liquidity, now there’s excess liquidity, which is working through the system,” Fisher said. “There are in my view, early signs of speculative activity that I don’t consider constructive.”

If he’s only seeing “early signs,” how far behind the curve do you think the rest of the Fed gang is? By the way, Fisher quipped that protectionism is “the syphilis of economics.” Interesting analogy. What’s the gonorrhea of economics? Probably speculation. It’s bad, but you can get rid of it pretty quickly.

Meanwhile, Philly Fed’s Plosser is dishing up some hawkish comments, saying headline inflation is “all that matters,” and core is just for filtering noise. The frank talk is welcome, but stock market ignores him because his hawkish tendencies are well know.

- US stock markets seemed to find euro strength a source of comfort yesterday, and have frolicked with the single currency again today. But euro’s lost some zest in early afternoon trading and is catching some notice from stocks, which have since pulled back from their earlier highs.

As is often the drill, IBM and CAT together account for roughly 40% of the DJIA’s advance, at this point up 70.

- Now to the absurd file. JPMorgan strategist Thomas Lee takes the cake today for the headline on his morning US equity strategy note: “History showing post-nuclear disaster bounce is 9.6% for the next 3-mos plus negative investor sentiment point to upward bias in next few weeks.”

We kid you not. That’s what he wrote. After nuclear disasters, stocks usually bounce about 10% in the next three months. Uh, yes, sample size is a little small, so be careful taking this one to the bank, citizens.

Question for Mr. Lee: What are the returns for stocks three months after two regimes are deposed in North Africa, another nation erupts in civil war, a third European nation collapses financially and needs a bailout, and the world’s third-largest economy gets hit with a 9.0 earthquake, followed by a tsunami, followed by a nuclear crisis?

(Paul Vigna contributed to this post.)

The tone remains bullish for stocks this morning as the ongoing stream of liquidity provided by the Fed’s QE, and more recently by Bank of Japan, courses through global markets. Stocks were strong in Asia overnight, currently higher in Europe and US stock futures point to a higher open.

As of yesterday’s close, major US indexes have erased declines following the Japan quake/tsunami/nuclear crisis. Risk aversion remains just a dalliance, a mere gesture now and again, even as the litany of stresses and perils around the world hardly ever seemed higher.

A third look at 4Q GDP due at 8:30am ET, and final look at Reuters/Univ of Michigan March consumer sentiment at 9:55am. S&P futures off their earlier highs, up 3.60; 10-yr note up a little, yield at 3.39%.