U.S. stocks shook off mid-session weakness to rally in the afternoon session, marking the first session this week in which the broad market has moved meaningfully in either direction – Monday’s gain and Tuesday’s decline were both fractional moves. 

Financials, tech and utilities led the broad market higher.  Energy, basic materials, telecoms and consumer discretionary were the losers. 

Crude touched a post-crisis high of $109/barrel, but slipped back to the $108 handle after the weekly energy report showed a smaller-than-expected increase in crude stockpiles and gasoline inventories fell much less than expected – wholesale gasoline closed down a penny to $3.19/gallon. 

It appears that analysts weren’t expecting refinery utilization rates to increase.  That rate rose to 84.4% from 84.1%, which is what delivered the lower-than-expected stockpile build -- frankly I’m surprised refinery rates didn’t increase more as the crack spread (measures the profit margin on cracking a barrel of oil into refined product) is

nearly three times the 10-year average.  Gasoline demand slipped on both a weekly and y/o/y basis.

You may remember a couple of weeks back when we mentioned that Portuguese Prime Minister Socrates’ statement claiming that government didn’t need an EU bailout meant that they needed a bailout – this after all was exactly the way the Greek and Irish bailouts played out.  Well, yesterday Mr. Socrates informed the EU that they’ll need to tap the European Financial Stability Fund. 

Market Activity for April 6, 2011

Sector Activity for April 6, 2011

Central Banking

The ECB and BoE (central banks for the eurozone and UK) had been signaling for several weeks now that a hike in their respective benchmark interest rates from emergency levels was coming (which is the likely the reason the euro and pound have rallied so hard against the greenback).  The ECB followed through on that talk with a 25 basis point hike in their rate, while the BoE proved that talk is cheap by holding not only their rate steady but making zero progress in unwinding unprecedented policy by keeping their bond purchase program intact – I’m guessing the slide in UK industrial production for February (released yesterday) causes the UK central bank enough concern that they couldn’t pull the trigger. 

For the ECB, the expectation is that they want to continue hiking so that they get their rate to 2.00% (currently at 1.25% with this hike).  But engaging in more tightening has become vastly more difficult as Portugal’s the third domino to fall. 

What we see here is that both central banks are in a box, just as ours is, as they contend with both economic weakness and higher rates of inflation – in the UK it sure looks like technical stagflation as their GDP contracted in the fourth quarter (and may again in the first after this IP reading) yet inflation is running 4.4% y/o/y.  The latest rally in the euro/$ pair has probably run its course as a result.  That is, if we find the European central banks are unable to tighten as expected, then the greenback may very well gain some ground against those currencies, but it is very hard to tell as Bernanke remains addicted to ZIRP and will do everything in his power to keep real interest rates from rising.

Mortgage Apps

The Mortgage Bankers Association’s applications index fell for a second-straight week but apps to purchase a home did rise 6.7%. 

The overall index declined 2.0% as refinancing activity (which currently makes up 62% of all mortgage loans) declined 6.2% in the week ended April 1, which follows the 10.1% slide in the prior week.  The average contract rate on the 30-year fixed mortgage was unchanged at 4.93%.

But the purchases side of the index rose for a third week in seven.  While it’s nice to see some activity occurring after a three-month period (December-February) in which purchase applications slid 18%, the purchases applications index remains at a 13 ½ year low. 

Data for the Rest of the Week

It’s been a quiet week on the economic data front, and we really don’t get back into the normal amount of daily releases until next week.  But beginning today we get last week’s jobless claims reading, same-store retail sales for March and one of the preliminary consumer confidence readings for April. 

We’ll watch to see if initial claims hold below the 400K level (they’ve been below that mark for six of the last eight weeks, but barely), y/o/y same-store sales growth remains positive even as a late Easter plays havoc with the figure, and consumer confidence improves after sliding in March (I’m not confident it will with gasoline prices even higher).  

And that last parenthetical comment brings me to this question:  Can stock prices continue to advance simply because the Fed continues to pump massive amounts of liquidity into the system, when that liquidity is also a preponderant element in pushing commodity prices higher? 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900