U.S. stocks gained ground for a third-straight session, and the only two down days of the past 15 sessions were nothing more than fractional declines, on the heels of Tuesday’s Fed statement – yesterday’s reported decline in producer prices for February only reinforced the fact that the Fed won’t feel pressure on the inflation front to remove their unprecedented level of accommodation anytime soon.  (Not that the Fed would be focused on inflation if it were a threat, not with 10% unemployment, banks that need a super-steep yield curve and a housing market that remains beaten down…but this is for another discussion I guess.)

The broad market did give back about a third of its earlier gains late in the session, but held on to record solid performance. 

Energy shares led the advance (first time for that in a while) along with financials and materials.  All 10 major sectors gained ground on the session, but there were clear laggards as utilities and health-care shares were the deepest under-performers.  

The Dow Industrial Average followed the S&P 500 in making a new 17-month high, surpassing what had been the recent high of 10,725 hit on January 19.  Shares of Exxon, Chevron and Caterpillar led the Dow higher – energy stocks had conspicuously lagged the broad market over the past couple of months, but with crude now testing $83/barrel, they’ve found a bid.

Market Activity for March 17, 2010

Greenback Slipping

The dollar closed lower for a second-straight session and since the Fed decided to keep its “extremely low levels of the federal funds rate for an extended period” phrase completely intact it has dropped handily below the 80 level again on the Dollar Index. 

The greenback appeared to be stabilizing right at that 80 level (slightly above to be exact, and even with a little risk-trade action) but Bernanke and Co. have stomped it back down to the 70 handle.  It appears that the dollar remains trapped in this trend of needing a bout of investors concern, a run for safety, for the dollar to move back above 80 – which I view as an important level. 

I think there are two important levels on the Dollar Index actually.  One is the 80 mark, which is where we really need to stabilize above.  The other is the 75 mark, a move below this number is the danger zone; if it slides to 75 there’s a real concern we’ll test the all-time low of roughly 71.50.  If the greenback does slide, life will become even more difficult for the Fed – rescue the dollar by hiking rates by more than this economy can handle or ignore it and risk a capital outflow.  (This is one reason I wish the Fed would just get fed funds back to 1.00%, it may show currency traders they’re watching the greenback and thwart another round of shorting the dollar, which means Bernanke won’t have to jack rates higher via a rescue attempt and crush this still fragile economic state.)

Second Thoughts

In a little twist regarding the Greek government’s financing issues and the EU bailout, it seems Germany is having some second thoughts – and to be sure, they were never enthralled with providing a lifeline to Greece as they’re the ones that would have to do the heavy lifting.  The German finance minister is now saying the Greeks should look to the IMF.  This may very well change the game, at least pertaining to how the market views this issue.  Not so much with regard to Greece, but if Spain, Portugal and Italy need support to finance their debt problems too. 

Mortgage Applications

The Mortgage Bankers Association’s weekly applications index slipped 1.9% for the week ended March 12 after two weeks of increase.  Applications to purchase a home fell 2.3%, which followed a 5.7% bounce in the prior week, and refinancing activity dropped 1.7%. 

The rate on the 30-year fixed mortgage fell to 4.91% on average during the week, down from 5.01% for the week ended March 5.

The purchases figure is really what we’re watching here.  While it bounced in the prior two weeks, activity remains extremely depressed as those who have a job fear losing it and those who don’t obviously aren’t in the market to buy a home. 

Producer Price Index (PPI)

The Labor Department reported that producer prices fell 0.6% in February (a decline of 0.2% was expected), which follows a 1.4% jump in January and a string of three month increases that had the figure up 14% at an annual rate. 

Just as Tuesday’s import price data suggested, most of the overall decline was driven by the largest energy component --- for this index that’s gasoline.  PPI ex-energy was up 0.2% for the month – even this reading remains tame though as it’s up just 3.3% at an annual rate over the past three months and just 1.6% from a year-ago. 

The gasoline component dropped 7.4% during February, after January’s 11.5 surge.  This decline in not going to last though as wholesale gasoline has jumped 12% thus far for March.  Not all energy price fell, as residential gas was up 0.8% -- up 6.8% at an annual rate last three months, but still lower by 8% since February of 2009.

The decline in gasoline prices pushed the overall consumer goods component lower for the month, but other segments of this component were up, such as prescriptions (up 0.2%) and passenger cars (up 0.5%). 

Food price rose 0.4% for the month, up 4.4% at an annual rate last three months, yet higher by only 2.3% over the last 12 months. 

Intermediate goods within the producer price index ticked up just 0.1%, but are up 10% at an annual rate over the past three months.  This is an area to watch as it may be a signal of inflation in the pipeline – although with regard to the degree with which firms have slashed payrolls, and the resultant boost to productivity, business will be able to absorb higher input costs and thus will not need to pass them on to the consumer – not yet at least.

From a year-over-year perspective, PPI is up 4.4% (market expected a rise of 4.9%).

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900