U.S. stocks held in there again yesterday, yes the major indices spent most of the session below the cut line, but a nearly 1% rise in the final 30 minutes of trading sent the broad market into positive territory for the session.

Yesterday’s data releases were not positive, but stocks were able to ignore initial jobless claims back above 470,000 and the latest regional manufacturing report that missed expectations by a wide margin and showed negative results from its employment indicators. 

Utility and consumer staple shares led the advance – six of the 10 major sectors gained ground for the session. Consumer discretionary and basic material shares led the groups that declined – which included financials and telecoms. 

Volume was especially weak again, which has been the case for the last five sessions, with just over one billion shares traded on the NYSE Composite – the six month average is 1.2 billion and volume over the previous several years had averaged 1.5-1.6 billion per day.

Market Activity for June 17, 2010

Consumer Price Index (CPI)

The consumer price index declined 0.2% for May, after being down 0.1% in April.  This marks the first back-to-back monthly decline in CPI since the financial crisis hit its crescendo in the winter of 2008.  This time the declines are not widespread, but rather completely a result of the energy component. 

Excluding energy, CPI was up 0.1% for the month, matching the increases of the previous three months.  On a year-over-year basis, CPI is up 2.0%, down from the 2.2% print for April. 

Bottom line, the consumer price gauges are flat (although the measures don’t exactly reflect actual price activity in the marketplace, but what else do we have to go on?) and will remain tame for…well, I don’t know for how long exactly, which is obvious as my call 15 months ago had inflation accelerating by now. 

While we’ll see the headline figure begin to rise again (oil and gasoline prices have bounced of late) over the next few months, the increase may very well prove transitory for now.  It will be some time before we see the harmful levels of inflation that will inevitably arrive.  When the economic weakness that I believe will begin to present itself via the GDP reports by year end/early 2011 pushes the Fed into a new and more robust round of quantitative easing, there will be no stopping the start of harmful levels of inflation – but again it will take a while as the de-leveraging process that must occur has been delayed by government intervention; this process will likely keep inflation at bay.

The Fed sees inflation as the lesser of two evils as they know the economic framework is fragile and the probability of a double dip is high – even if they won’t admit it.  Don’t pay attention to their words, but their actions.  They are trying they’re darnedest to incite 4-5% inflation and once that genie is out of the bottle, boy it’s tough to stuff the old chap back in – although it will finally present a very nice opportunity for the fixed income side of the portfolio.

Initial Jobless Claims

The Labor Department reported that initial jobless claims rose 12,000 last week to 472,000 (a decline to 450K was expected) – the previous week’s reading was revised up by 4K to 460K.  The four-week average slipped to 463,500 from 464,000 in the week prior.  This number is going to tick up again next week after this 472K print.

Continuing claims fell 100,000 (up 88K for the standard 26-weeks worth of benefits and down 191K on those EUC claims that extend bennies out to 99 weeks), continuing the downward trend.

So, initial claims refuse to move below the 450K level (we need these claims to dive below 400K, but have to get to 450 first), and in fact appear more likely to hit 480K –this would mark our third run back to 480K after flirting with sub 450K).

The overall decline in continuing claims is good to see, but with initials this elevated and the exhaustion rate chillin’ at 54% (as a percentage of those who have been collecting jobless bennies) it’s clear the move is due to benefits expiring rather than a healthy level of job creation. 

Philly Fed

The Federal Reserve Bank of Philadelphia released a strange looking Philly Fed (factory activity out of the third Fed district) in which new orders, delivery times and inventory building looked good, but the employment and pricing figures were bad.

For the overall survey, the headline reading was a big disappointment, driven by those employment readings, falling to a reading of 8 for June from 21.4 in May.  While a reading above zero suggests activity expanded, this is the lowest level in 10 months.

The positives:

The new orders index rose three points to a reading of 9; delivery times jumped back to expansion mode, up to 6.8 from -1.2 in May; inventories surged to 4.6 for June from

-7.9 in May. 

On the negative side:

The number of employees sub-index fell to -1.5 from 3.2; the average workweek also slipped to contraction mode, down to -1.5 from a reading of 7.0 for May.  For the first time in seven months, more firms reported a decrease in hiring (18%) than reported an increase (17%) – those percentages were 21% and 17% in May. 

The prices paid figure fell to 10.0 from an elevated level of 35.5 (which it had averaged for eight months).  So one wants to get excited about that, but then you look what happened to prices received; it plunged to -6.5 from 3.5. 

The negative in this report may just be a one-month blip.  My expectation is that manufacturing activity will slow as we enter year end and post really weak readings by early 2011.  If this latest look is a sign of true weakness then the damage will begin to occur quicker than that assessment, but we have to wait for the June data to confirm deterioration. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900