U.S. stocks began the session higher as pre-market futures suggested another day of gain, but the major indices quickly erased that initial rally as crude prices rose back above $98.barrel.  The S&P 500 hadn’t traded lower on the first day of a month since July. 

The high cyclicals led the decline as basic materials, industrials and financials were the worst-performing sectors.  Tech, consumer discretionary and even energy (despite the move in oil) also underperformed the broad market.  Consumer staples, health care and utilities out-performed, but even these areas of safety closed in the red.

Fed Chairman Bernanke’s testimony before Congress, at least his comment that faster inflation via surging commodity prices is likely to be “temporary,” appeared to be the catalyst that drove crude toward the $100 mark and wholesale gasoline surging 26 cents to $2.99/gallon.  (Driving in I noticed pump prices were actually down 3 cents but if this level on the wholesale holds, you can bet we’ll see $3.40 in STL and $3.75 on the national average.) 

Such statements signal that the Fed is unconcerned about the rise in commodity prices (as if this hasn’t been clear for a long time) and foments traders to speculate the central bank will do nothing in the intermediate future to halt the rise.  Hence they’re given the green light that the commodity trade remains in play. 

Could Bernanke’s reckless monetary policy decisions finally be backfiring, via the higher energy prices that crush global growth expectations?  We’ll see.  But if the global economy doesn’t derail due to tightening policies in Asia first, then as oil reaches $110 the Fed’s policy will begin to Bernankfire.  At which point, the Fed will have wished it brought fed funds back to 1% and never entertained the idea of QE2.  Of course, the latest 25%-30% of this stock-market rally from the nefarious 666 low on the S&P 500 may have never occurred, but then monetary policy isn’t supposed to focus on stock prices anyway.

Market Activity for March 1, 2011

Sector Activity for March 1, 2011

ISM Manufacturing

The Institute for Supply Management’s gauge of factory activity in February confirmed what the regional reports have signaled:  Manufacturing activity remains strong..

The ISM Manufacturing reading came in at 61.4 (estimate was for 61.0) from 60.8 for January – hot levels and very unusual considering this expansion is running below trend growth of 3.2%, let alone the 7.5% average rate of growth that followed previous deep recessions.   This is a level that the ISM’s economists say corresponds to 6.0% real GDP.  Yet the latest GDP print was 2.8% and has averaged just 2.9% during this six quarters of expansion. 

And the internals of the report suggest something hotter, which would have shown up in the headline reading (maybe as a 64-65 print) if not for the inventories measure falling back to contraction mode.  New orders inched higher to 68.0 (a level hit just 3% of the time over the past 40 years); backlog of orders up a point to 59.0; supplier deliveries holding at the same level; and employment rose nearly three points to 64.5 (a level hit only one other time in the past 40 years). 

And yes, prices paid rose again, up a half point to 82.0 (a reading reached on only two other occasions over the past 40 years when CPI was running below 5%).  Currently, CPI is showing inflation at 1.6% year-over-year. 

So, if ISM prices paid means anything these days (which it may not as we’re not seeing the above-trend growth it’s signaling) either inflation is coming or profit margins will indeed undergo significant compression. 

Construction Spending

The Commerce Department reported that construction spending fell for a second-straight month in January as a 5.1% increase in residential spending wasn’t enough to offset the 3.3% decline in nonresidential – nonresidential accounts for 68% of total spending. 

This latest decline sends spending on construction projects very close to the 11-year low hit in August. 

If not for the federal government picking up the slack (and we must understand that we’ll incur serious costs for this deficit spending when interest rates normalize – there’s no free lunch no matter how many people today believe there is), construction spending would be even lower. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900