U.S. stocks ended a three-session winning streak as traders seemed to step back and watch to see how things play out in Japan, the Mideast and EU. 

The session was rather boring in fact as the broad market traded in a tight range on low volume.  The telecom, utility and health-care sectors managed to close higher.  Industrials, consumer discretionary and financials were the biggest losers.

The Dollar Index closed flat as it lost ground against the pound, Swiss franc and the yen (no yen intervention yesterday), while it gained against the euro and Canadian dollar.

Crude closed up 1.6% to $104/barrel, pushed higher by news that the Israel/Hamas conflict intensified – and up another 1.4% this morning to $105.40. 

While yesterday’s trading activity was relatively dull, there were plenty of other things brewing even beyond develops in the Mideast and Japan…more on that below. 

Market Activity for March 22, 2011

Sector Activity for March 22, 2011

 Monetary policy looks set to get a bit more interesting as the ECB continues to signal they’ll raise their benchmark interest rate from emergency levels and UK inflation has risen to 4.4% year-over-year, putting pressure on the Bank of England to begin tightening.  If the ECB and BoE actually move on rates over the next couple of months, this will leave the Fed alone in the wilderness as they hold policy harmfully easy.  As a result, the dollar will continue to get hammered absent a halt to QE or some adverse event that returns the run for safety. 

And speaking of adverse events, as if we don’t have enough, an economist over at JP Morgan believes there’s a high likelihood that the Portuguese government will collapse this week and have to access the EFSF (EU bailout fund) – a function of failing to agree on the current austerity plan.  Whether it’s a week from now or six months, this was always only a matter of time.  And even as they are bailed out, short of a complete restructuring of not only the budget but of their entire economy, that government will eventually have to restructure its debts (investors will take a haircut); the same is true for Ireland and Greece.  

And this goes for the U.S. too if we don’t quickly come to our senses.  Dallas Fed President and current FOMC voting member Richard Fischer reminded everyone yesterday that the U.S. faces insolvency if we continue down the current path – in reality the U.S. won’t technically default on our debt but we’d have to inflate our way out of the situation by printing even more money.  He also made a point of stating the process of returning to relative fiscal prudence is going to be painful.   And this is the point that everyone needs to understand, you can’t escape reality; eventually you have to pay the piper and the longer we try to mask over structural problems the harsher it becomes. 

FHFA Home Price Index

We just spent plenty of time on the issue of home prices yesterday, so I’ll keep this one short. 

The Federal Housing Finance Agency’s (FHFA) index of home prices, which captures only GSE owned or backed mortgages, recorded its third-straight month of decline in January.  The measure fell 0.3% for the month and is down 3.9% over the past 12 months.  It is down 17% since hitting its peak in April 2007, much better than either CaseShiller (down 31% from its peak) or the National Association of Realtor’s median price measure for all existing homes (down 32%). 

Richmond Fed

Factory activity within the Federal Reserve’s fifth district (covered by the Federal Reserve Bank of Richmond) decelerated in March but remained at a robust level. 

The measure fell to a reading of 20 (expected to come at 24) from 25 for March, which was a reading touched only four times in the index’s 18-year history. 

Nearly all of the index’s internal segments eased.  New orders, order backlogs, capacity utilization, vendor lead times and the average workweek all decelerated but as the overall reading suggests remained at good levels.  The number of employees held steady and the wages component inched higher. 

The prices paid measure fell, just as we saw within the Philly manufacturing report last week (the Empire report showed prices paid within the New York area accelerated).  It seems strange to see two of the three major regionals post a decline in prices paid as energy prices jump during the month.  But the commodity indexes dove during the first half of March as metals prices fell as the risk-trade came off.  Prices paid measures should resume their ascent again in April as the back half of March showed metals prices staged a comeback – it’s still contingent on what those prices do during the first half of April. 

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Have a great day!

Brent Vondera, Senior Analyst