Well, we did see volatility, even within the volatility index. At one point VIX was down more than 8%, but somewhat recovered by the end of the day closing down only 3.9%, while the equity market (S&P 500) closed up 0.5%. So some option play with VIX or VIX ETFs likely paid off.
Economic indicators were mixed, but the two important ones came in below expectations.
ADP was at 91K, below the 100K consensus. In addition, it revised its July numbers down by 5K. While Challenger job cuts for August were slightly lower than July's 16-month high, they were still up 47% from Aug. '10.
So, again, the labor market is not recovering fast enough. However, as we mentioned earlier, the Fed's helping hand more than offsets these not so impressive numbers. By the way, with the election being only 13 months away, President Obama will try to provide some color on how he is planning to address the dismal job market by having a speech during prime time next week. We'll see what Bernanke, Axelrod, Emanuel, Geithner, Krueger and the rest of his buddies advised him to say.
The MBA (Mortgage Bankers Association) Mortgage index for last week declined another 9.6% from the week before. The decline was mostly due to a drop in refinance applications. Home purchase applications went up only 0.9% (non-seasonally adjusted was actually down 1.3%), even though the average 30-yr fixed rate went down to 4.32% from 4.39%. According to MBA, "purchase volume remained near 15-year lows."
July factory orders were above expectations, but that was mainly due to recovery from the supply-chain shock. Also, that was for July.
Surprisingly, Chicago PMI for August was at 56.5, well above the 53.0 estimates; and that good news, which we think was due mainly to the recovery in motor vehicles, helped keep the equity market in positive territory. We note that nearly all important components declined, including production, new orders, and order backlogs. One good sign was that the employment part increased slightly, but that may not continue.
Two additional important figures will be released tomorrow - initial weekly claims and ISM. We think initial weekly claims will be in-line with the 407K consensus. Continuing claims will likely decline as many have not found new jobs and their unemployment benefits are running out. Don’t be surprised if you see headlines highlighting the decline in continuing claims as positive.
Regarding ISM, the news may not be as bad as the market expects. We must say that unless it is significantly below the 48.5 consensus, given the Fed's very visible hand, a miss on the ISM number won't have a significant negative impact on the market. Given that the Fed hasn't been able to help the economy recover much, it is trying (and will continue to) to create more 'positive thinking', hoping it will help everyone work harder and get the economy going. We love the psychological monetary strategy!
Our own estimate of around 49 - 50 is based on what we have seen from regional surveys conducted by the Feds and what we saw this morning from Chicago. After 'playing around' with the numbers, our estimates ranged from approx. 48 to 51. Production will likely be low, along with new orders and backlogs, but given that employment decisions are not made on the spot nor can be changed that quickly, similar to what we saw in the Chicago figures, the employment component of the ISM might be slightly higher than July.
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