U.S. stocks ran into a little headwind on Monday as traders worried that financial regulations will limit trading at investment banks (duh, of course it will – if it can pass) and the rolling concern China will pull back on their stimulus measures. The concerns apparently weren’t very significant as they dissipated late in the session; the broad market rallied in the final hour to close just about smack dab on the same number for the third-straight session now. 

The day’s economic reports were mixed, with the latest regional manufacturing survey (the first we’ve received for March) coming in quite strong, yet the latest overall industrial production figure showed some weakness.  Too, the latest reading on homebuilder sentiment showed the housing market is far from normalizing. 

The traditional areas of safety– consumer staples, utilities and health-care -- helped the broad market post a fractional increase.  Energy, basic material, tech and financials were the losers on the session.

The U.S. dollar advanced against its foreign currency counterparts, holding onto earlier session gains that followed rather direct words from China – they stressed that other countries should not pressure them on the value of their currency. 

The rhetoric is heating up, as we touched on yesterday morning, and probably has some concerned about a trade war – so the dollar rallied on a little run for safety.  It’s a bit too early for real trade war concerns just yet, but the words of aggression accompany reckless tariffs that Congress has levied (and others they plan on levying) on Chinese imports.  This is dangerous territory if protectionist policies continue to roll. 

Market Activity for March 15, 2010

Empire Manufacturing

The New York Federal Reserve Bank reported that its Empire survey (factory activity within the second Fed district) decelerated in March, but remained hot.  The measure slipped to 22.9 from February’s reading of 24.9, so cooler but anything over 20 is strong and the internals of the report were more than solid – the reading was also a touch above expectations.

The new orders index jumped to 25.4 from 8.8; unfilled orders and delivery times both advanced – delivery times rose to 5.5 from -6.9 and unfilled orders up to 4.9 from 2.8; inventories increased to 4.9 from 0 (first rise above zero since August 2008); the number of employees jumped to 12.4 from 5.6 (highest since October 2007) as the average workweek was up strong.

This is the first look at manufacturing activity for the month and gets us off to a good start – I’ll note that Empire has been the hottest of the regional factory gauges.  One’s really got to like what’s occurring in the delivery times and unfilled orders readings.  As you may remember, we’ve been watching these two for indication that current workers are becoming stretched and thus some hiring will have to occur.

The data shows that the manufacturing sector continues to lead the economy expansion, but I remain cautious as the cyclical headwinds increase (the nascent recovery has largely been driven by government spending and auto production and that kick is going to wane in the back-half of the year) it will be a real test for factory activity.  If the private sector is not willing/able to take over, if businesses lack the confidence to go out and aggressively spend on equipment and payrolls and consumers cannot buy more cars, then manufacturing will wane in a considerable manner.

Industrial Production

The Federal Reserve reported industrial production (IP) kept the streak going, increasing for the eight-straight month now, but just barely.  The reading -- which tracks production in manufacturing, utility and mining – rose just 0.1% in February (slightly better than the expectations of no change). 

Manufacturing production, which makes up the bulk of the IP measure as it accounts for 80% of the index, fell 0.2%.  This is actually the second time in the eight-month increase streak for the index in general in which factory production fell.  The first time was in December and IP only rose that month because of a huge weather-related boost within the utility segment.  This time it was a 0.5% increase in utility production (which is normal for Feb.) and a large 2% increase in mining activity.

The manufacturing component was dragged lower by a 4.4% decline in motor vehicle/parts production.  Tech equipment looked good though, up 1.0% for the month, and machinery assemblies rose 0.3%.

Capacity utilization continued to rebound last month, but remains at recessionary levels.  The figure rose to 72.7% and has made decent progress from the all-time low of 68.3% hit in June.  But the figure has a ways to go as the long-term average is 80.5%.  It’s difficult to imagine any meaningful increase in plant and equipment spending with so much existing capacity idled.

TIC

The Treasury’s International Capital (TIC) report showed that foreign demand for U.S. Treasury debt remained solid in January, but weak for GSE paper (basically Fannie and Freddie debt) and corporate bonds.  Foreigners kept buying U.S. stocks.

Foreigners purchased $61.4 billion of Treasury securities (down from $70B in December), but sold $5 billion in GSE debt (down from no change in December) and $24.6 billion of corporate bonds (which is down nine of the past 10 months).  Foreigners bought a net $4.3 billion of U.S. stocks (11^th straight month of increase – bought $20.1B in December).  

NAHB Sentiment Index

The National Association of Home Builder’s latest gauge of confidence among builders slipped in March as the continued flow of distressed properties makes it especially difficult on new-home sales.

The reading pulled back to 15 from 17 in February and will have a tough time turning higher until the job market comes back.  Besides dealing with foreclosed properties, which trade at distressed prices and attract buyers to existing homes, builders are dealing with high joblessness that makes it difficult for buyers to obtain financing for new homes.  The extension of the tax credit and the Fed’s $1.25T in MBS purchases to suppress mortgage rates has had no meaningful effect – new home sales fell to the lowest level on record in January.  We’ll see if there is any bounce in the final months of the tax credit’s life as the weather turns warmer.

And while the weather is having an adverse effect (the prospective buyers index sank to 10, which is just three points above its all-time low hit in December 2008), it’s not like the gauge of prospective buyers showed much life before these snowstorms hit.

Waiting for the Fed

So the latest FOMC meeting ends today at 1:15CDT and that means all eyes and ears will be on their closing statement.  They are not going to raise the target rate on their benchmark interest rate; the market understands they won’t do this any sooner than six months removed from some tweaking of the statement – the Fed will be very careful not to surprise the market for fear of a significant stock sell off.  Could we get some tweaking today?  Say, the removal of the “extended period” phrase (with regard to keeping rates exceptionally low) to something more like “will keep the level of federal funds at exceptionally low levels for some time.”   With each passing meeting we move closer to some change in language from the Fed, and that means things will get much more interesting. 

Have a great day!

Brent Vondera, Senior Analyst