U.S. stocks erased early gains, which has become the trend over the past week, sending the broad market lower for a third-straight session.  Stocks were unable to withstand a lowered 2011 growth forecast for developed economies from the International Monetary Fund.

The price of crude fell back to the $109 handle, closing Monday’s session at $109.92/barrel, on that lowered IMF forecast.  Their forecast for the U.S. was reduced to 2.8% from 3.0%, well below the 3.5-4.0% that most economists appear stubbornly stuck to.  I typically find IMF estimates pretty much worthless, and this one may prove about as wrong as their previous estimate, but it seems a lot closer to the reality on the ground than the levels to which most of the major investment banks continue to cling. 

Consumer staples and health-care were the only of the 10 major industry groups to close higher; telecoms also out-performed, but did slip for the session.  Energy, utilities and basic material shares were the worst performers. 

So after leading the major sectors on Friday as crude hit $113/barrel intraday, energy was the biggest loser yesterday.  Even though the price of oil remains at highly profitable levels it’s hardly a surprise the group got hit by 2% -- people are quick to take profits from the hottest sector of the past two quarters.  It’s the downdraft the utility sector has endured that’s got me a little confused. 

Of course, rising interest rates (or the belief they’re going higher) will put pressure on the group.  However, when the 10-year Treasury yield was approaching 5.50% back in 2007 utility stocks were hitting their all-time highs along with the rest of the market; today we say rates are surging when the 10-year hits 3.60% -- hardly a rate that makes the sector’s dividend yield of 4.40% unattractive.  Besides, as we muddle around this 2.5% rate of economic growth (which would mark a weakening as we did 2.8% in 2010) I doubt interest rates gain much traction. 

Market Activity for April 11, 2011

Sector Activity for April 11, 2011

After a Quiet Period We’ve Got a Big Week Ahead

The week just passed was a quiet one on the data front, but we get back to it this morning with the NFIB’s small business confidence survey (March), import prices (March) and the trade balance (February). 

The NFIB’s measure of small business confidence, which covers everything from small business hiring plans to sales expectations, has spent the last five months above the 90 handle, which is an improvement but it is also a level that’s always (before now) been accompanied by periods of recession.  Further, the last print of 94.5 remains below the 37-year average of 98.6.    This number needs to get above 100 (should be approaching 105 by now) to offer a real signal that small business is back on track.

The trade balance will be watched particularly closely because we need all the help we can get with regard to Q1 GDP.  We’ve talked about how personal spending and inventories won’t provide the boost they had in past quarters, so we’ll need trade to pick up the slack.  Oil imports will probably keep this segment from offsetting weakness in those other areas. 

And then we have import prices, which are surging as the U.S. dollar continues to get hammered – you can blame much of this on Bernanke’s QE addiction.  On a year-over-year basis import prices were up 6.9% in February, which is double the rate just five months prior.  We’ll probably hit 7.5% y/o/y for March due to the price increases for oil and food – the oil component is up 20.6% y/o/y and food/beverages up 15.8%.

For the rest of the week, we get retail sales, the consumer price index (we’ll watch to see the degree to which inflation cuts into real spending, which is what counts for GDP), jobless claims and industrial production. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900