U.S. stocks lost some ground yesterday after the Labor Department reported that initial jobless claims jumped last week, crushing the idea that they’ve begun to trend lower.  The difficulty in adjusting for back-to-back holiday weeks provided the fake out. 

But how negatively is this market going to view poor labor statistics when it simply means the Fed will continue their magic act? 

Overseas bourses rose for a second-straight session the night before and that too helped to buoy the U.S. market.  Much of the most recent worries regarding the EU debt situation revolved around the lead up to the Portuguese and Spanish auctions, but now both have gone well.   Of course, we won’t ultimately know the true cost of Eurozone debt financing until the ECB backs away from its bond purchases and backstops.  I’ll repeat, if things were going so well why exactly do we still need this unprecedented help from central banks?  

Telecoms, consumer staples and industrial shares gained ground for the session.  Of the other seven major industry groups, basic materials, health-care and financials led the losses. 

The Dollar Index was down for a fourth-straight session yesterday.  All it took to send the greenback slumping again was a little strength in the euro – the idea that the USD was rallying for organic reasons was a laugher.

A tale of two monetary policies is shaping up as the Western countries keep the pedal to the metal, while the Asians are tightening things up due to exploding food costs (which consume a higher percentage of total income than in more affluent economies) and asset bubbles.  The ECB and BOE (Eurozone and British central banks), decided to hold their benchmark rates at very low levels yesterday (and we know what our Fed is doing), but South Korea, Thailand, India and China continue to raise rates and reserve requirements.  This will be yet another challenge for the global economy.  Asian economies will have to show a nimbleness that central banks are probably incapable of as they seek to reduce soaring prices, while not doing too much damage to economic growth.  And their attempt to reduce costs becomes all the more challenging as the Fed works against them by keeping policy balls to the wall.

Market Activity for January 13, 2011

Jobless Claims

The Labor Market reported that initial jobless claims jumped 35,000 to 445,000 last week -- much worse than the 410K expected, which would have been unchanged from the prior week’s reading.  We cautioned against too much excitement over the recent dip among initial claims as the Labor Department can have a tough time adjusting for these back-to-back holiday weeks (Christmas and New Years). 

The four-week average rose 5,500 to 416,500.

Continuing claims were mixed as the standard issue of claims slid a massive 248,000 to 3.879 million, while the emergency level of claims (those that extend out beyond the traditional 26 week to as long as 99) rose 128,367 to 4.635 million.  And I’ll remind everyone that these continuing claims lag by a couple of weeks.  That is, the standard issue is a week behind (so the 248K reduction actually took place in the New Years week, which means they’ll jump again along with initial claims) and the emergency claims data is two weeks behind.  

So forget about the idea that initial jobless claims had moved into a new sub-400K trend -- which was quite an unreasonable assumption.  But what looked to be a lower trend just prior to the holiday weeks to the 420K mark, down from that 450K-level trend that took so long to break, may now also be in jeopardy.  I think we’ll still see claims fall back to the 420K-425K level as the first couple of weeks following the holiday season generally jumped as retailers begin to shed temporary workers – a situation that lasts only a couple of weeks.  But considering the labor market shed 8 million payrolls during the recession and 6 million of this payroll destruction took place in a blinding 11-month period, we should at least see initial claims back to the 300K level by now and possibly the 200K handle.  Beyond the seasonal hires, who exactly is left to layoff?

PPI

Producer prices jumped 1.1% in December (a 0.8% increase was expected), which boosts the annualized rate to 12% over the past three months – so the trend isn’t looking too good.  But don’t worry because the Fed excludes foods and energy from their inflation consideration (too bad the rest of us can’t) and when you exclude these components (what’s referred to as the “core rate”) producer prices rose just 0.2% last month and are down 0.5% over the past three months.

The crude goods segment of the report, which are goods used in the initial stage of production, also paint a rather troubling picture of future inflation as the figure jumped 4.0% in December and is up 30% at an annual rate over the last three months. 

These costs may have trouble funneling into the consumer level as firms are forced to eat them (a bad sign for future profit growth) due to very weak pricing power.  These input costs also paint a rather unwelcome picture regarding the degree of future hiring as firms are unlikely to add to costs by boosting payrolls.   

Trade Figures

The trade deficit narrowed a bit more in November, according to the Commerce Department, following the large 13.9% narrowing that occurred in October.  The figure eased 0.3% in November, down to $38.309 billion, which is quite a reduction from the $46.901 gap as of August. 

The headline reading was a bit deceiving though, leading financial press commentators to state that the November results will help boost GDP – the trade category within the GDP report is net exports, so when export activity outpaces imports then it adds to GDP.  The reason it was deceiving is because the GDP figure is calculated using the real (price-adjusted) trade figures.  On this basis, the trade deficit actually widened just a bit as real exports fell 0.6%, while real imports fell just 0.1%.  The decline in the real trade deficit over the past two months (thanks to that large decline in October) will still provide a boost Q4 GDP, but not because the November reading helped out. 

Foreclosure Filings

Foreclosure filings fell below the 300,000/month mark for the first time in 21 months as they declined 69,800 to 262,339 in December.  Don’t get too excited though as the decline was a result of foreclosure moratoria due to the robosigning fiasco. 

Foreclosure filings will surge in the months ahead and all that’s occurred is yet another delay that pushes the ultimate end to the housing market’s trouble further out. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900