U.S. stocks shook off the disaster that hit Japan to recover about a third of Thursday’s fairly significant decline.  For the week, the broad market (as measured by the S&P 500) still lost 1.28% -- down two of the past three weeks.

Energy, basic materials and industrials led the market higher. Telecoms and consumer staples were the session’s losers. 

So Japan was hit by the worst quake in 140 years.  It’s amazing how quickly things can change as we woke up Friday morning thinking the Saudi “day of rage” protests was what we’d be watching.  Obviously, that event had the potential to drive oil prices higher, although it was pretty clear by Thursday that the monarchy had stomped out any esprit de corps among the protestors.  Now, we focus on an event that is pushing energy price down.  We had seen some profit-taking in the energy markets of late; this event has led to more as crude’s back to $99/barrel.  (I’m a bit puzzled by this move.  Yes, I see the global growth concern as Japan was already in contraction mode, but the regions that were being powered by nuclear energy will need more oil to power the rebuilding process.) 

Also on the international scene, I saw that the latest inflation number out of China printed 4.9%, which alone would result in further policy tightening.  We’ll see if this Japanese disaster has the opposite effect on policy as central banks hold off on tightening or even engage in more easing. 

The Bank of Japan began injecting “massive” liquidity into their economy last night (previously reported at 7 trillion yen but now at 15 trillion yen, or $183 billion, and doubling their asset purchases – among those are outright purchases of stocks).  The liquidity providing measures that inject money so banks can meet the surge of withdrawals that occur after disasters are one of the traditional tasks of a central bank; however, buying assets such as stocks are not.  And with regard to our own central bank, the whole situation has an extended lifespan of QE2 written all over it – specifically because of our economy’s intense dependence on higher stock prices (with the labor market weak and home prices down) and the possibility that Treasury yields may be forced higher as the Japanese government needs to liquidate positions – they are the second-largest foreign buyer of Treasury securities. 

The international bourses are holding up quite well after the Nikkei 225 slid 6.2% and Japan’s broader market (the Topix Index) took a 7.5% beating.  European bourses are actually flat as I type and U.S. futures aren’t down all that much.

Market Activity for March 11, 2011

Sector Activity for March 11, 2011

Retail Sales

The Commerce Department reported that retail sales jumped 1.0% in February after a 0.7% increase in January, a figure that was revised up big time as it was previously estimated to have risen just 0.3%.  Excluding gasoline and auto sales, activity rose an equally strong 0.7% after the 0.6% in January – revised up from 0.3%.  Core retail sales (which exclude gasoline, autos and building materials – and gets plugged into GDP), jumped 0.6% and that follows an equal 0.6% gain in January.   Over the past two months this segment is up a massive 7.2% at an annual rate, but the GDP figure will be adjusted for inflation, which this number is not. 

This core reading shows that first-quarter GDP is going to get a nice boost from its largest component – personal consumption.  And we’re going to need it as the trade figures and core business spending components look like they’ll weigh on growth. 

As the increases among the aforementioned segments suggest, activity was solid-to-strong across nearly all items – furniture (a housing situation) and online retail (a reversal from the big increase in January due to bad weather) were the only line items to post declines.  Motor vehicles sales were up 2.3% (accounted for half the advance in total sales), electronics sales up 0.9% (halting four months of decline), building materials up 0.6%, gasoline up 1.4% (can’t wait to see this one for March), eating & drinking up 1.2%, clothing up 0.8%, and general merchandise up 0.7%. 

Bottom line, retail sales have been on fire for six months now.  One has to think that this activity is being mostly propelled by the continued stock-market rally.  Yes, most of this six-month period involves holiday shopping (remember that holiday shopping is extended through January due to gift cards – those sales are not counted until the card is redeemed) and the very recent improvement in the labor market also encourages people to open their wallets, but the wealth effect is surely behind most of this. 

But when consumer activity is not based upon a strong job market and real income growth, then it is  merely a transitory event.  As a result, when stocks correct, and of course they will, consumer activity immediately follows. 

U o M Confidence

The University of Michigan/Rueters measure of consumer sentiment dropped nine points to a reading of 68.2 in March (expected to fall little more than a point) – erasing the past four months of gains.  Unlike the retail sales data, which covered February activity, this confidence reading measures consumers’ mindsets for March when fuel costs began to surge – the national average for gasoline hit $3.55 this morning. 

The index had clawed back to a new 12-month high, but the March results knocked it back to the lower-end of the 18-month range.   The expectations segment of the index (designed to measure respondents’ business and financial outlook over the next 12 months) got slammed back to the lowest level in two years. 

Inflation expectations over the next year jumped to 4.6% from 3.4%. 

Business Inventories

The Commerce Department reported that business inventories rose 0.9% in January and sales jumped 2.0%, which pushed the inventory-to-sales ratio back to 1.23 months worth of supply – that ties the all-time low first hit in March 2010. 

Because firms remain cautious, with the exception of a four-month string last fall sales continue to outstrip stockpile building.  As a result, inventories will return as a contributor to GDP this quarter – and GDP needs all the help it can get as the measure is running below trend growth and less than half what we should be seeing at this point in the cycle. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900