U.S. stocks pared early losses, escaping much hit at all relative to how bad futures looked in pre-market trading.  There’s this view that stocks are on sale with as little as a 5% move from the recent high (hit February 18) – I’ve even heard some people describe stocks as “on sale” when the S&P 500 was down just 2% from the recent high mark, which seems quite the silly statement.

All 10 major industry groups closed down for the session.  Basic material, energy and consumer shares were the relative winners.  Tech, utilities and industrials were the hardest hit. 

A couple of “black swans” (high-impact, hard to predict, and rare events) are present right now due to the 9.0 Pacific Plate quake and its aftermath of, coupled with rising Mideast tensions – reportedly a Saudi soldier was shot dead in Bahrain yesterday and people are beginning to talk about that country succumbing to sectarian violence.  Considering this, the market is holding up remarkably well -- probably a function of the Fed backstop; absent QE and the high chance that we’ll get even more, I believe we’d be trading considerably lower.  To wit, when one considers, the state of the housing market, both private and public debt levels (and where debt servicing ratios are going whenever rates do normalize), the low level of this recovery, higher input costs and now these “black swan” events I suspect the market would be trading at a multiple closer to 10-12 than the current 15. 

The Dollar Index was in rally mode, posting it strongest gain since January by midday, but as concerns dissipated the greenback slid back to yesterday’s close as all it has going for it is a disaster-led safety trade. 

Crude had fallen all the way back to $97/barrel (sounds strange to say that but oil hit $107).  All it needed though was a little easing of that safety trade as this morning it’s on its way back to $100.  Wholesale gasoline fell back to $2.80/gallon from $3.04 a week back (which hasn’t stopped retail from rising 10 cents last night to $3.50 in STL – then again the pump price had a ways to catch up as it normally sells at a 60-cent spread to wholesale, but was running at just 30 cents for a couple of weeks).  It’s rebounding too this morning. 

Market Activity for March 15, 2011

Sector Activity for March 15, 2011

Empire Manufacturing

The Empire Manufacturing survey, which measures factory activity within the second Federal Reserve district, accelerated in March to a reading of 17.50 – up two points from February and besting the 16.1 expected. 

The internals were mixed though.  New orders, delivery times and inventories all deteriorated – substantially.  What boosted the index were big moves in the employment figures, as the number of employees and average workweek measures jumped.  However, if new orders fail to hold up you can forget about new hiring a couple of months out. As a result, we’ll be keeping a close eye on new orders within the other regional reports for the month.  From there we’ll see how orders behave as the April report will reflect the catastrophe in Japan.  It could go either way really.  We should see export activity get a boost as there’s lots of rebuilding needed (Japan will move from a net exporter to a net importer). But this also curtails activity in other areas. 

The price measures continued to get worse, meaning it put additional pressure on margins in March.  The difference between the prices paid (which hit a level rarely seen and double the historic average) and prices received continued to widen.  

Import Price Index

Import prices continued to accelerate in February, jumping 1.4% for the month (expected to rise 0.9%) and 6.9% year-over-year (expected to come in at 6.3%).

This move is a function of the beating the U.S. dollar continues to take.  The only thing that will keep import prices from rising further in March is if this latest run for safety continues and results in dollar strength. 

The Fed says very little about the dollar, and when asked by members of Congress Bernanke dances around the issue.  But outside of more events that scare the market and lead to that aforementioned run for safety (a situation that’s seen the dollar strengthen since the financial crisis hit), the dollar and thus import prices will continue to get clocked – and you can blame in primarily on the Fed’s policy decisions; ugly federal budget realities also play a role.  

FOMC Statement

The Federal Open Market Committee (the policy setting group within the Federal Reserve System) followed the close of their meeting with the traditional statement.  The statement expressed that “the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.”   

The FOMC even threw their critics a bone by stating, “the recent increase in the prices of energy and other commodities is putting upward pressure on inflation.”  But it was a small bone and they quickly snatched it back as they later stated that measures of underlying inflation remain subdued and that they expect the aforementioned upward pressures on inflation to be “transitory.” 

Despite the belief that the economy is on a “firmer footing” the FOMC decided to maintain QE2 to its intended $600 billion of longer-term Treasury securities by the end of the second quarter.  Of course they also decided to keep their fed funds target rate at the virtual zero bound (actually a range of zero to 0.25%) for “and extended period” -- an obligatory comment as they obviously aren’t raising the rate for several months after dropping the “extended period” phrase.  And they won’t drop that phrase while continuing down the QE road of monetary perdition.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900