U.S. stocks closed a bit higher on Friday, holding up remarkably well considering a very ugly first look at consumer sentiment for September and the Fed’s latest on household net worth showed a turn down again after four quarters of rebound – down $1.5 trillion for the quarter and $12 trillion below the peak hit in Q2 2007.  Then again, the latest CPI reading showed that all is clear for QE2, it’s just a matter of time, and that’s probably what buoyed stocks. 

(I still believe the market will soon enough reverse its view of monetary stimulus as the question must eventually be asked:  Why exactly do we still need such unprecedented measures nearly three years after the recession began?   The answer is not stock-market friendly.)

Industrials, telecoms and tech drove the broad market higher.  The laggards were financials and energy.  Six of the 10 major industry groups did close higher. 

Volume was the strongest in more than a month, but still weak (off the six month average by 7.2%) considering it was quadruple witching – the expiration of single-stock and stock index futures and options. 

The S&P 500 advanced for a third-straight week, up 1.45% to return to the 1125 level for the first time since mid May.  The Dow Industrial Average is closing in on that 10,700 mark again.  We’ve made a round trip in about six weeks, hitting 10,700 on August 9, back down to 9930 by August 26, and returning to 10,600 currently.  

Market Activity for September 17, 2010

Consumer Price Index

The reading on consumer prices for August was right in line with expectations and continues to show that, at least by the way the government measures these things, prices are flat – the real world cost of living is significantly greater though, as everyone knows.

Headline CPI came in at 0.3% for August (largely driven by a bounce in the price of gasoline), and was up just 1.1% from a year ago – this year-over-year measure has been stuck at 1.1-1.2% for three months straight.  Core prices, which exclude food and energy, were flat for the month (no change from the previous month) and the y/o/y reading has registered 0.9% for five-straight months. 

These results, particularly the y/o/y core readings (frankly I don’t know how policymakers justify diminishing the importance of energy prices) sent another message to the market that QE2 is coming. 

In fact, the Fed will not only engage in another round of quantitative easing by early 2011, as we’ve discussed many times, they will also be raising their comfort zone on core inflation, which is too low at 1-2%.  I think it is appropriate for the central bank to set a target of 2-3% (a target of right at 2.5% is the economic sweet spot, in my opinion).  However, they’ll do so for reasons other than reasonable price activity that offers businesses pricing power and real income growth.  Raising their target range will allow them to keep monetary policy loose if commodity price inflation takes off and carries the overall CPI reading with it. 

University of Michigan Sentiment

The headline number from the UofM’s consumer sentiment survey came in at 66.6 for September, down 2.3 points from August’s reading – the consensus estimate was for an increase to 70.  The number for September is the first look, Uof M will issue a revision at the end of month.  The current level is the lowest since the 65.7 hit in August 2009.

The survey asks respondents their view on both current conditions and expectations a year out.  The current conditions reading ticked up to 78.4 from 78.3 in August – this segment hit the 85 handle in June.  The measure on expectations, slid back to 59.1 from 62.9 in August -- first sub-60 since March 2009, which is the month the S&P 500 hit 666, consumers were in hiding, and even manufacturing activity (clearly the strongest segment of the economy) was in deep contraction mode.

ECRI’s WLI

The Economic Cycle Research Institute’s weekly leading indicators (WLI) improved in the latest week to -9.2 from -10.1. This is the first print above -10 (the levels that has predicted each recession since 1970) in nine months, surely helped by the rebound in stock prices – a major component in every leading economic indicator index. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900