U.S. stocks got hit on Thursday after an ugly trade number out of China and European debt/banking worries combined with increased Mideast tensions.  (The House of Saud threw the hammer down, ordering police to fire on protesters, just to make sure today’s “day of rage” uprising doesn’t enjoy too much alacrity). 

Telecoms and consumer staples were the outperforming groups.  Consumer discretionary and utilities also beat the market.  The worst hit once gain were energy and basic materials.  There’s been real rotation out of materials since the market topped on Feb. 18; regarding energy it looks more like profit taking for now, but with the largest quake hitting Japan in 140 years, striking a major industrial base, who knows where crude will fall in the short term.  

The latest trade report out of China put some scare into the global-growth-will-withstand-Asian-policy-tightening crowd.  They reported that export demand weakened in the Pacific Rim, which has been a key driver of global activity.  I’m not sure the concern was warranted just yet as the Chinese trade figure may have been seasonal in nature; we’ll know if export activity fails to bounce in March.  But now with this Japanese quake, the resultant tsunami and serious aftershocks, activity in the region will be curtailed for a time. 

Spring is around the corner and it appears so are EU sovereign debt and banking system worries – recall this concern smothered the market last spring.   Thursday morning Moody’s downgraded Spain’s credit rating and estimated that the cost to bailout their banking system is double that of government estimates.  In addition, as we mentioned Monday, credit spreads across the euro-zone peripherals are rising again – Portugal, Ireland and Greece.  More people seem to be realizing that this debt are going to be restructured, and that means investors will be taking a haircut. 

The dollar rallied the most in a month on the European debt woes, and that’s what we’ve stated for a while is the only thing it has going for it.  As a result, one can hardly rejoice on the move, and it still remains at deep levels as the Dollar Index closed at 77.30.   Absent significant fear via Europe, it’s going to take a reversal of monetary policy to send the DXY to the healthier 85-90 level. 

Market Activity for March 10, 2011

Sector Activity for March 10, 2011

Jobless Claims

The Labor Department reported that initial jobless claims rose 26,000 to 397,000 last week, missing the 376,000 expected.  The four-week average increased 3,000 to 392,250.

Continuing claims declined nicely as both the standard issue (covering the first 26 weeks of unemployment) and emergency claims (extending out to as long as 99 weeks depending on the state) fell.  Standard claims fell 20,000 to 3.771 million and emergency claims slid 200,513 to 4.302 million.  Combine these figures and they remain at the unfortunate level of 8.073 million, but down by 500,000 over the past two months. 

So while the initial claims results weren’t as rosy as economists expected, they remained below the 400K mark and I’d call that a victory in this environment.  Add in that continuing claims remain on a downward path and I think this report on whole was actually pretty good. 

Trade Balance

The trade deficit widened by a large 15.1% in January, coming in at -$46.34 billion after the -$40.26 billion gap in December.  Excluding petroleum, which is the primary component behind the longer-term deficit, the gap widened by a huge 32% -- mostly due to higher prices. 

Exports rose 2.7% in January but imports increased 5.2%.  I’ve argued for a long time that a trade gap is in many ways a sign that U.S. growth is either picking up or outright strong as import activity is a function of consumer and business spending.  However, in this environment of high debt levels and a tenuous labor market I’m not sure how sustainable this activity is.  Also, from the perspective of the first-quarter GDP report, the gap in trade was driven as much by price increases as it was by activity. 

The real trade gap (adjusted for inflation) rose just 7.5% -- a large widening but half that of the nominal increase.  The real trade figure is what matters for GDP and even though the widening was just half that of the nominal result, the net exports component of GDP is going to weigh on first-quarter growth.   

The offset to deeper trade deficits is higher consumer and business spending activity.  However, if higher gasoline prices curtail consumer activity, the typical offset won’t be there.  We’ve seen estimates to first-quarter growth being revised down over the past week, and this number may lead to more. 

Finally, the falling U.S. dollar is supposed to be narrowing this trade gap, at least according to the academics, but it’s not the case – oh well, it works in the textbooks; that’s all that matters for policymakers.  Too bad the consumer doesn’t live in that fantasyland.  No, in reality they must absorb the corollary of a declining currency value -- higher import prices. 

Household Net Worth

The Federal Reserve reported that household net worth rose for a second-straight quarter (and six of the past seven quarters as stock prices have jumped), up $2.1 trillion to $56.8 trillion during the final three months of 2010. 

The value of stock holding rose $1 trillion during the quarter, which helped to offset the $244 billion decline in real estate.  Declining household debt has also helped the figure as consumers paid down debt – of course the disposition of mortgage debt via foreclosure is also a factor.  

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Have a great weekend!

Brent Vondera, Senior Analyst