U.S. stocks rose again yesterday despite dragging early in response to higher inflation and an increase in jobless claims.  Markets found their way into positive territory thanks to some positive earnings as well as a sharp improvement in the Philly Fed Manufacturing report.  Technology, health care, and consumer staples led the S&P 500, while financials were the big laggard.

Treasurys, crude oil, and gold all advanced while the U.S. dollar declined. 

Market Activity for February 17, 2011

Sector Activity for February 17, 2011

CPI

U.S. consumer prices rose 1.6% in January, with higher prices for food and energy accounting for more than two-thirds the rise in consumer prices.  Food prices jumped 0.5% in the month, the biggest increase since September 2008, with gains across all six major grocery store food groups.  Meanwhile, energy prices jumped 2.1% last month.

So everything you already own – a house, a car, a stock portfolio – has rapidly declined in value.  Everything you actually need to buy – food, gasoline, medicine, education – is going up.  Some people call this phenomenon biflation.  I call it annoying...

The Fed strips out food and energy costs in their measure of inflation, which presently makes inflation less of a concern and supports the Fed’s stimulative policy.  But yesterday we saw that wholesale prices rose across the board in January, meaning companies will soon choose between shrinking profit margins and passing higher costs on to consumers.  The latter would be a major headwind to consumer spending, especially when wages don’t keep pace. 

Last month, real average weekly earnings fell due to declines in the average work week and hourly earnings.  The race between wages and inflation may become a very important factor in determining the direction of the economy later this year. 

Jobless claims

Initial jobless claims rose to 410k from 385k last week.  The four-week moving average of new claims, a less volatile measure, increased 1,750 to 417,750.

Jobless claims have been quite volatile over the past two months largely because of the weather – when state-government employees don’t report to work they can’t file the claims.  Still, the trend is lower.  Many industries are seeing an improvement in demand and holding on to their workers.  The hope is that demand remains stable enough that companies start adding to payrolls, rather than simply not firing, which could lead to even higher demand and maybe start a positive feedback loop.  Only time will tell if this scenario will come to fruition.

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Peter Lazaroff, Investment Analyst

Phone: 636-449-4900