markets take in a dose of holiday cheer

Investors embraced the holiday spirit last week, pushing equity prices higher over the course of the week.  The S&P 500 Index rose 3.0% and the Dow Jones Industrial Average was up 2.6%.

 

Economic indicators provided generally positive data until Friday’s employment report, which landed with a resounding thud. 

 

In the middle of the week, it was announced that manufacturing activity slipped from 56.9 in October to 56.6 in November.  While the rate of growth slowed, any reading above 50 is still indicative of expansion in the manufacturing sector, so the minor drop is not problematic. 

 

Source: Institute for Supply Management

 

Earlier in the fall, pessimists were pointing towards a slowing ISM index as a surefire harbinger that a “double-dip” recession was on the way.  That did not happen, fortunately, and manufacturing activity has since rebounded.

 

Several subcomponents also provided encouraging data.  In particular, the employment index finished the month at 57.5, a clear-cut sign that manufacturers are continuing to hire in order to keep up with growing demand.  Somewhat less positive was the prices paid index, which remained elevated at 69.5 in November.  This is a continuation of a trend from recent quarters whereby producers are stomaching higher costs and are simply unable to pass those costs through to consumers.  

 

Later in the afternoon, the Federal Reserve released its Beige Book, detailing economic activity across the various Federal Reserve districts.  The report indicated that economic activity was higher for a majority of the 12 districts, however, home price declines were experienced in certain areas and several districts reported a lack of skilled labor as a contributing factor to poor employment growth.  

 

For many strategists, it is never too early to start predicting the future.  In this instance, the annual ritual of S&P price targets is already in full gear for 2011. 

 

Equity strategists are actually doing quite well for 2010, with the markets only a few points away from the year end price target that was estimated at the beginning of this year.  It should come as no surprise that analysts are expecting the markets to climb higher next year, resulting in a gain of slightly less than 10%.  

 

Source: Bespoke Investment Group

 

Strategists may be optimistic on the equity outlook but the fixed income market has undergone something of a correction in recent weeks. For the first time in nearly two years, fixed income mutual funds experienced a net outflow.  In the two weeks ending November 24^th, bond funds recorded outflows of roughly $6 billion.  That is hardly a blip when considering the massive flows into bond funds over the previous two years, but it may be the start of a shift in sentiment for investors. 

 

Source: Marketwatch

 

The recent sell off was predicated by a weakening of Treasury yields, which moved from a low of 2.4% in October to 3.0% more recently. 

 

Source: USA Today

 

The most amusing story of the week came from none other than the President himself.  On Monday, President Obama announced a two-year pay freeze on federal pay.  What the President failed to mention is that in the past five years the number of federal workers earning more than $150k is up tenfold.  According to a USA Today analysis from earlier in November, federal workers earning more than $150k rose from 7,420 in 2005 to 82,034 by 2010. 

 

Another report released by the Cato Institute over the summer found that the average wage for federal employees was $81k relative to $50k for individuals in the private sector.  Perhaps a pay cut would be more effective than a freeze this time around.

 

Source: Cato Institute

 

39k is the best we could do?  Really?

Investors were severely disappointed on Friday when it was revealed that nonfarm payrolls rose a meager 39k in November and the unemployment rate jumped from 9.6% to 9.8%.  On a positive note, job growth in October was revised higher to 172k, but that may be a small consolation for most at the moment.

 

Source: Econoday

 

Without a doubt, this recession and subsequent recovery is by far the most severe in terms of the contraction experienced in employment.  Nearly 36 months after the recession began, nonfarm payrolls are 5% below the peak.  That is more than double the previous worst recession.  

 

Source: Federal Reserve Bank of Minneapolis

 

One contributing factor to the recent weakness has been unwillingness by retailers to hire temporary employees for the holiday season.  Over the course of October and November, retailers hired 433k employees, more than the 367k in the same period last year, but well below the levels prior to the recession.

 

Source: Calculated Risk Blog

Ultimately, last month’s reading may prove to be an deviation.  By all common measures, employment growth should have been fairly robust in November.

 

For one, initial claims for unemployment insurance steadily moved lower, with the 4-week moving average of claims now at 431k.  That is an admittedly high level, but well below the 500k reading experienced only several months ago.  It is also the lowest point since the recovery began.  

 

Source: Haver Analytics

 

In addition, nonfarm payrolls were revised higher for both September and October in the most recent release, something we are likely to see occur for November, as well. 

 

There remain challenges with the employment markets in this country, however.  The average unemployed individual has now been out of work for 33.8 weeks and that shows no signs of reverting.  Extended unemployment benefits expired at the end of November, which will affect another 2mln people by the end of the year. 

 

the week ahead

It will be a relatively quiet week for economic data.  Indicators of interest will be consumer credit on Tuesday, trade balance on Friday and consumer sentiment, also on Friday. 

 

Several Treasury auctions are set to occur this week.  This includes $32bln of 3-yr notes (Tuesday), $21bln of 10-yr notes (Wednesday) and $13bln of 30-yr bonds (Thursday).

 

Europe will remain in the crosshairs this week, with Irish finance minister Brian Lenihan presenting future budget expectations, which are likely to include up to €6bln of pay cuts and tax increases.  OPEC, the Organization of Petroleum Exporting Countries, will meet on December 11^th to discuss current quotas and changes.  It is unclear whether oil ministers will agree to increase production, as many are comfortable with oil in the $75 to $85 per barrel range.

 

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