U.S. stocks resumed the march lower on Wednesday and while the market bounced off of the session’s low (as occurred on Tuesday), the losses over the past two days were pretty much commensurate with what futures were signaling pre-market on Tuesday morning.  With yesterday’s move, the S&P 500 and NASDAQ have turned negative for the year.

Consumer staples, telecoms and utilities were the relative winners; although even these areas lost ground as all 10 major industry groups traded lower for a second-straight day.  Tech, industrial and basic material shares were the worst hit. 

The market shook off ugly data on residential construction activity and a bad situation getting worse in Bahrain (proxy war has broken out between Iran and Saudi Arabia as Iran’s Revolutionary Guard reportedly incites the Shiite protests) was also completely ignored as all focus remains on the Japanese catastrophe.

It was late in the morning session when things went bad as all kinds of claims regarding the status of the nuclear situation in Japan began to fly.  But with about 90 minutes left in the session stocks staged a comeback on talk that TEPCO (Tokyo Electric Power Co) had nearly completed a “power line” able to bring power back to the nuclear complex.  However, the company didn’t confirm how close they were to completion and the market slid again in the final minutes of the session – but still held above the day’s worst levels.  (This morning we find they weren’t close at all to completing the power source.)

The Dollar Index advanced for the first session in three, but still lost ground against the Japanese yen that’s absolutely on fire.  Then an hour after U.S. stocks closed complete disorder gripped the currency markets as $/yen plunged ($ weaker, yen to record postwar strength).  Part of this is a function of the risk trade unwinding (you can track the move in $/yen nearly in unison with the activity in stocks), the rest I suppose is traders getting in front of repatriation as businesses must sell assets (such as insurance companies) to convert back to yen to pay damage claims and cover general rebuilding.  This morning the Dollar Index has hit that 75 handle we’ve talked about for a while now as an intensely uncomfortable level and sign our central bank is losing control of things, in my opinion.

This move in $/yen is probably beyond Bank of Japan intervention at this point – and just maybe (although probably unlikely) the BOJ doesn’t want to intervene right here as the Japanese economy is about to become a net importer rather than their traditional role as net exporter due to the massive quake/tsunami damage – stronger yen means those imports they’ll need become cheaper.  As a result, there’s a G-7 teleconference scheduled after U.S. stocks close today.  Surely they’ll be talking about a reverse Plaza Accord intervention (the Plaza Accord was when what was then the G-5 orchestrated an intervention to sell the U.S. dollar as it become super strong in order to support the yen).

Market Activity for March 16, 2011

Sector Activity for March 16, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell 0.7% during the week ended March 11 as purchase activity pressured the measure. 

Refinancing applications increased 0.9% last week as the average contract interest rate on the 30-year mortgage fell 14 basis points to 4.79%.  However, the move in rates wasn’t enough to keep purchases going after the previous week saw a 12.5% bounce as they fell 4.0%.   It’s still mostly about jobs; we can forget about a consistent and durable expansion in home sales before the labor market enters a strong recovery. 

Housing Starts

Housing starts got crushed last month, nearly tumbling to the all-time low hit in April 2009.  I recall when stocks rallied as January’s housing construction results jumped 18.4%, which I found laughable considering the fact that we hardly need more supply hitting the market and the sector makes up only 2.2% GDP at this point anyway. There are plenty of people who believe we need more apartment buildings, and multi-family units is what drove the January housing starts reading higher, as home buying will remain weak.  However, remember all those For Rent signs you’d see while driving around town following the financial crisis?  There’s plenty of supply out there (particularly since multi-family starts are up 33% over the past 12 months), certainly until we fix the long-term unemployment problem.   

For the specific results, construction on residential housing units slid 22.5% in February (expected to fall just 5%) to 479,000 at a seasonally-adjusted annual rate (SAAR) – the all-time low of 477K was hit in the spring of 2009.  This follows an 18.4% bounce in the previous month that put housing starts at 618,000 SAAR. 

Multi-family construction (which accounts for 20% of all residential construction) fell 46.1%.  Single-family starts fell 11.8%.

And the permits reading, which signals construction activity over the next couple of months, failed to paint a rosy picture for March and April as they fell 8.2% (expected to rise 1.2%.  Building permits hit a new low.

Producer Price Index (PPI)

Produce prices jumped 1.6% in February, driven by the food and energy components.  On a year-over-year basis, PPI accelerated to 5.6% from 3.6% in January. 

Residential gas jumped 3.2% for the month (and is up 10.5% at an annual rate over the past three months); gasoline rallied 3.7% in February (up 52.9% annualized over the past three months); and the foods component gained 3.9% for the month (up 21.7% annualized past three months).   How’s that feel?  At least for the affluent consumer has higher stock prices to cushion the blow – besides even as stocks will inevitably correct food and energy outlays do not account for much as a percentage of total income for the high-end consumer.  For everyone else it’s not very pleasant and is shaping up to become a harsh reality for the lower middle class.

But food and energy doesn’t matter to Bernanke & Co., (how long before demonstrations begin outside the Eccles Building?) so they watch the core rates of inflation – which exclude those components.  Core PPI rose just 0.2% in February and has advanced just 1.8% over the past year.  You see, all is good. 

The crude components of PPI (those used in the earliest stage of production) gained another 3.4% in February (up 67.5% at an annual rate over the past three months), which eventually move up the chain. 

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Happy St. Patrick’s Day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900