U.S. stocks fought off some mid-session weakness to close higher for the first session in four as traders seemed less concerned about the troubles in Japan and FedEx expressed confidence package volumes will continue to increase.  European bourses also provided a nice catalyst to the U.S. market as they rallied 2% across the board, offsetting another session of losses out of Asia (talking Wednesday night). 

Energy shares again were the best-performing group, nearly doubling yesterday’s performance of the broad market.  Telecoms, basic materials and industrials also outperformed.  Utility, consumer discretionary, staples and tech underperformed, but all 10 major industry groups closed higher for the session. 

The day’s economic reports were mixed as jobless claims and a super-strong Philly Fed reading beat expectations, while CPI and industrial production missed. 

Commodity prices rebounded after a few days of decline, led by the prices of wheat, corn, cotton and crude.  Crude broke back above the $100 mark again to close at $101.34/barrel and is up to $102 this morning on news that the UN Security Council authorized a no-fly zone over Libya.

The dollar lost ground, but bounced off of its worst levels of the session to close into the 76 handle as the Dollar Index settled at 76.04 – the Dollar Index measures the value of the greenback against the euro, yen, pound, Canadian dollar, Swedish Krona and Swiss Franc.  The Japanese yen held ground to remain at postwar strength. 

But as we’ve talked about for a couple of days now intervention was coming, and it came last night as the G-7 (US, Germany, France, Italy, Britain, Japan and Canada) decided to intervene after the yen surged to record strength on Wednesday night.  As a result, the yen has now weakened against the US dollar.  Maybe we’ll discuss this topic more specifically in Monday’s letter as we won’t have an economic release to touch on – although with all that’s going on these days, coming out of the weekend it’s likely we won’t struggle with things to talk about.  

Market Activity for March 17, 2011

Sector Activity for March 17, 2011

Jobless Claims

Initial jobless claims fell 16,000 last week to 385,000 (fifth month out of six below 400K) – besting expectations these claims would fall to 388K.  The four-week average declined 7,000 to 386,500.

Continuing claims were mixed as the standard issue (which provides benefits for the first 26 weeks of unemployment) fell 80,000 to 3.706 million – the fourth-straight month of decline, while emergency claims (extend benefits out to 99 weeks) rose 54,000 to 4.356 million.   This results in a net decline but total continuing claims remain off the chart at 8.062 million.  We’ll see this number come tumbling down, back onto the chart, when the emergency claims expire at the end of the year.  Of course, these 99ers will have to find work by then or we’ll have some issues on our hands. 

Bottom line: This is an important report for initial claims as it covers the week ended March 12 (which corresponds with the survey week for the March payrolls report), so the move down to 386K means the March jobs number will be another good one.  However, we need stronger payroll increases than what we’ve seen (double the average of the past three months), and for an extended period of time.  And then we have the long-term unemployment problem.  If this isn’t resolved by year end when the extended benefits expire, then it will combine with lower after-tax incomes (as the payroll tax reduction expires at the same time) and we’ll see spending take a hit.  

Consumer Price Index

The consumer price index rose a larger-than-expected 0.5% in February (expected to increase 0.4%) and while the year-over-year number remains tame, it rose to 2.1% from 1.6% in January.

The headline CPI reading has posted 0.4% or higher for three months now, so annualize it and you get 5.6%.  Maybe commodity prices trend lower and what currently look like problem levels of coming inflation dissipate, but if it doesn’t then the Fed’s going to have another issue on their hands. 

Now, Bernanke & Co. will have the cover of the core rate, as it removes food and energy prices, but the clock appears to be running out on that game – the longer food and energy prices continue to rise without a serious pull back the faster pressure will build that they abandon the measure.  That core CPI reading came in at +0.2%, matching the January increase.  This means even the Fed’s unrealistic measure is creeping higher, but remains below 2% year-over-year at +1.8%.

Industrial Production (IP)

Industrial production during February came in weaker-than-expected as it fell 0.1% when it was anticipated to jump 0.6%.  This does follows an upward revision to the January number but anyway you look at it there’s been a weakening as the IP index has flattened out over the past three months. 

Most of the decline was due to the utility component as warmer weather caused a 4.5% decline (this component accounts for 11.4% of the total IP index).  However, half of the 0.4% increase in manufacturing production (accounts for 75% of the index) was dominated by one segment – motor vehicle production.  So while the headline miss wasn’t as bad as it seems on the surface (due to the weather factor), the manufacturing segment was too dependent on auto production – at least for this one month.  And there seems to be something else tugging at the utility sector, it’s not all weather as this number is seasonally adjusted – thus it adjusts for changes in temperatures. 

Philly Fed

Factory activity was on fire in the Fed’s third district (covered by the Federal Reserve Bank of Philadelphia) as the Philly Fed reading jumped to the highest reading in 27 years. The index hit 43.4, whipping the 28.8 print that was expected, from an already elevated 35.9 in January. 

The internals of the report showed that much of the boost came from a big move higher in inventories, but new orders were also extremely strong (printing highest reading since 1983) so I don’t see a problem with big stockpile rebuilding.  Unfortunately, despite the strong activity the employment reading decelerated. 

Surprisingly, the prices paid index fell.  The measure remains at a level hit only three times over the last 30 years, but you may recall the New York factory readings continued to show increasing prices so a decline in Philly seems a bit strange – particularly since crude producer prices (prices of goods used in the initial stage of production) posted another large increase in February.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900