U.S. stocks reversed an opening rally to turn lower after Wells Fargo downgraded the semiconductor sector, concerns that energy-prices would place an additional drag on the economy seemed to pick up and CDS (credit-default swaps -- the cost of protecting against default) covering EU peripheral-economy debt are on the rise again. 

The energy-price story placed the biggest drag on stocks as the Wells Fargo downgrade was mild and held an optimistic tone and the EU CDS story hasn’t received much attention. 

Utilities were the only of the 10 major industry groups to close higher.  Telecoms and consumer staples also outperformed but did close lower.  Basic material, tech and consumer discretionary shares were the hardest hit sectors. 

The U.S. dollar was getting clocked yesterday morning, but reversed course when stocks began to tumble as energy-price worries set in again.  A run for safety is the only thing the dollar has going for it as there is zero bipartisan desire to venture down the path of aggressive federal spending cuts, the ECB talks about monetary tightening, and the Fed’s latest comments relay a move to further easing.  And speaking of which…

Market Activity for March 7, 2011

Sector Activity for March 7, 2011

Wheeling Us Around

The surge in energy prices has caused economists to lower their 2011 growth forecasts – specifically a consumer-related threat because if wholesale gasoline holds above $3/gallon it’s only a matter of time before $3.60 at the pump hits STL and $4.00 on the national average (currently $3.51).  As a result, the Fed’s wasted no time attempting to front this issue as they try to stomp out pessimism for fear their primary concern right now, a stock-market slide, comes to fruition; as go stock prices so goes consumer spending.

The latest in this campaign was delivered via a speech yesterday morning as Atlanta Fed Bank President Lockhart stated the central bank shouldn’t rule out additional asset purchases beyond June (QE2 is set to expire on June 30, but as we’ve talked about several times, it was always an open-ended program).  Now, Dallas Fed President Fischer expressed an antithetical view as he mentioned he may vote to end QE2 before it expires in June.  However, Fischer is known as an effusive central banker and even if the threat is serious he’s hugely outnumbered. 

There are those who believe the economy can stand on its own, able to continue expansion without unprecedentedly easy monetary policy.  To the contrary, the consensus view within the Eccles Building clearly believes the economy needs the policy equivalent of a wheelchair.

And the wheelchair analogy seems to be the correct one to me.  We’re not talking about what would be a more normal monetary easing policy that brings fed funds down to 3%, later having to raise it back to the 5-6% level after the business cycle had expanded for a couple of years.  Today we are at zero, and below zero in fact due to the QE campaign – and that’s what QE is all about since you can’t push fed funds to -2 or -3%.  Our policy makers seem stubbornly unwilling to wean the economy out of this chair, and that’s what’s had me concerned for a long time now.  Just like a patient who hasn’t had to use their legs for a really long time, the longer we continue down this path the more difficult it will be for the convalescence to take place as atrophy sets in.  When the Fed is finally forced to move, and I can’t know what that catalyst will be, the more often the economy will stumble and the longer it will take to grow on its own. 

Consumer Credit

The Federal Reserve reported that consumer credit rose $5.01 billion in January (a $3.5 billion increase was expected), but that was off of a large $2.0 billion downward revision to the December reading (up $4.09 billion instead of the +$6.09 previously stated).  Factoring in the revision then, the data actually missed expectations. 

The rise in consumer credit continues to be driven by non-revolving credit (auto and student loans).  The expansion of auto loans, while a function a very low rates and easier credit standards at dealerships, is partially a result of an improving labor-market outlook (if you don’t fear you’ll lose your jobs the propensity to finance a car increases).  The student loan situations, however, is likely a story of those without a job returning to school. 

The other major segment of this report continues to fall though.  Revolving credit (credit cards) declined for the 28^th of the past 29 months.  Not that this is a bad thing, it’s simply a necessary condition – one step toward getting the household balance sheet right again.  But the situation does tug on growth at the margin. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900