U.S. stocks rallied yesterday led by industrial and technology shares, pushing the S&P 500 above the 200-day moving average for the first time since May 20.  The move completes the fourth positive session over the past six; the broad market is up 6.1% from the seven-month closing low hit on June 7.

Energy shares were also among the best-performing groups fueled by 4.4% gains in both storage & transportation and equipment & services shares.  Coal stocks also gained good ground as a 28% jump in natural gas prices over the past three weeks may prompt utility companies that have dual-use capability to make the shift from natty to black magic. 

A good manufacturing report out of the New York Fed Bank district was portrayed by the financial press as a sign that the global economy is able to withstand Europe’s debt crisis – you know I love this stuff, as if this all works at blinding speed.  Europe hasn’t even implemented their austerity measures, if they even garner the political will to do so before markets ultimately force it upon them.  Slow to non-existent growth in Europe will not effect May, June of July data here in the U.S. and Asia; it will weigh on activity at the margin over the next couple of years.  The statement that a regional factory report is showing the globe can withstand European woes is ridiculous – and I’m afraid the global economy will have to withstand much more than just Euroland weakness over the next 18-24 months. 

Instead of the market trading on the Empire report, as was portrayed, it was all about technical levels.  Volume was especially weak, not just yesterday, but over the last three sessions. 

So we’ll see if the S&P 500 can hold above the 200-day.  If it does the next level of resistance is the 50-day moving average, or 1143.  (See the chart beyond the jump)

Market Activity for June 15, 2010

Import Prices

The Labor Department reported that import prices fell 0.6% in May, a move that was all due to the petroleum component as the ex-petro reading rose 0.5% for the month.  Import prices are up 8.6% over the past year.  That year-ago comparison was very easy as it was just above the cycle low hit in February 2009, so the  y/o/y readings haven’t been all that important but will become so beginning next month as the comparisons become more normal.

The petro component slid 5.0% in May after pretty large increases over the previous two reporting months. 

We’ve got the U.S. dollar up 16% over the past six months, largely on euro weakness, and that will help to ease any import price inflation.  However, with a six-month deep water drilling ban in place any increase in oil prices from here will become increasingly important as we’ll be importing even more crude.  (That is if the gushing oil well, which is now supposedly spewing 10 times the amount of crude and natural gas that was originally estimated, doesn’t feed into the Houston Ship Channel and shut down imports – at that stage we’ve got a real energy shock on our hands.) 

Empire Manufacturing

The first look at factory activity for any given month is always presented via the Empire Manufacturing survey – measures activity within the second Fed district – and the measure came in at 19.57 for June after 19.11 in May, the 11th straight month of expansion.  A number above zero marks expansion.

On the surface, the report showed activity remained pretty robust, it missed expectations by just a little bit but anything near a reading of 20 is strong.  However, the survey also showed that while activity looks good, factories are unwilling to add much more to stockpiles and will meet increased work by increasing hours to the current payroll rather than adding staff – exactly the kind of behavior we’ve been worried about. 

For instance, the new orders index hit 17.53 after 14.30 in May; delivery times returned to expansion mode, hitting 9.88 after the -6.58 in May (this means delivery times slowed); and hours worked jumped to 8.64 after 0.00 in May, although it has been trending around 10 for four of the past five months – a strong level.

On the other hand, the inventories index remained in contraction mode for the second straight month, coming in at -1.23 after May’s -1.32; and while the number of employees index remained in expansion mode, it slid to 12.35 from 22.37 in May – which means more respondents stated they are not adding workers. 

Also, the unfilled orders remained in contraction mode for the third-straight month, coming in at -1.23 after -7.89 in May.  While it improved over the previous month, three months below zero may be signaling weakness a couple-to-three months out.

TIC Flows

The Treasury International Flows report, a measure of foreign buying of U.S. assets, fell to $83.0 billion in April after March’s record $140.5 billion increase. 

Foreign buying of U.S Treasury securities fell to $76.4 billion from $108.4 billion in March; buying of agency debt fell to $14.3 billion from $22.0 billion; purchase of U.S. corporate bonds fell to $10.1 billion from $16.1 billion in March; and purchases of U.S. equities slipped to $10.1 billion from $11.2 billion. 

The important component to watch right now is the Treasury purchases, and it cuts both ways.  With the $1.5-$2.0 trillion in debt we’re issuing per year, we’ll need strong demand to keep interest rates low – even a move to 4.5%-5.0% on the 10-year (just to touch on one segment of the curve) will result in a significant increase in funding costs.  Conversely, strong demand into the Treasury market at these extremely low interest rates also shows the safety trade remains in effect, and thus economic fundamentals remain troubled. 

Watch for foreign purchases of Treasury securities to jump when the May figures are released, as this coincides with the run for safety due to increased worries over the European sovereign debt crisis.

NAHB Housing Market Index

The headline reading for the National Association of Home Builder’s sentiment index fell from all already ultra-low print of 22 in May to 17 in June – so the index was unable to even hold the pathetic bounce that resulted from tax credit driven sales.  A reading under 50 illustrates more respondents are seeing “poor” conditions for sales than those viewing conditions as “good.” 

The present sales reading also fell to 17 from 23 in May – no surprise there, as again, the tax credit led to a very temporary increase in sales.

The future sales reading (expectations) dropped to 23 from 27 in May

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900