U.S. stocks ran into a little trouble yesterday, sending the broad market lower for the fourth-straight session and down five of that past six. 

Our market followed a rough session for overseas bourses after Japan was hit by two 6+ magnitude quakes Monday night – this makes for four 6.0-7.1 magnitude temblors since Thursday.  The government also raised the radiation alert to the highest level, matching that of the 1986 Chernobyl disaster.   The latest retail sales results out of the UK didn’t help either as those figures fell 1.9% y/o/y in March (the most in six years); British recession is a real risk as a negative GDP print for Q1 will mark two quarters of contraction. 

In addition, worse-than-expected results on the domestic data front illustrated that Q1 economic growth here at home may come in at less than half the rate many economists had expected just a few weeks back – the latest small-business survey, import prices and trade figures all disappointed.

The consumer staples sector was the only of the major groups to close positive, but health care and utility shares also outperformed on a relative basis.  The high cyclicals were the hardest hit as energy, basic materials, and tech led the losses.

The price of oil got hit hard after Goldman Sachs issued a report stating that the price of Brent North Sea will fall back to $105/barrel (currently at $122) as the market is well supplied.  This obviously had an effect on WTI (West Texas Intermediate), which is the variety we watch in the U.S., sending it down 3.55% to $106/barrel.  I read someone jokingly comment that Bill Dudley has photos of Lloyd Blankfein at Scores – meaning the Fed blackmailed Goldman to lower their forecast for commodity price in order to foment a sell off.   Kind of funny stuff, although as dependent upon the Fed as the banking system is these days, I don’t think strip club photos are really necessary.

The greenback got whacked again; the Dollar Index fell into the 74 handle to close at 74.85.  The U.S. dollar, against a basket of foreign currencies, is down 7.5% since January and hammered by 37.5% since the Fed initially went to 2% fed funds in December 2001.

Market Activity for April 12, 2011

Sector Activity for April 12, 2011

Expecting Rates to Surge?  Keep Waiting

Treasury bonds rallied yesterday, pushing yields back down, on that disappointing economic data. As the chart below illustrates, the 10-year yield has been in a clear trading range over the past two years.  Each time it approaches 4.00% at the high end (and resistance has occurred as low as 3.75% of late) the rate gets pushed back down with 3.20% being the support level.   People keep expecting rates to surge, but Bernanke & Co. is determined to stop that from occurring.  Further, economic growth is much too weak, thus the bond market is not yet willing to overwhelm the Fed.

(The oval that encompasses the dip below 3.20% when the 10-year rate slid to 2.50% occurred when stocks corrected by 16% in the spring of 2010 and then Bernanke signaled another round of Treasury purchases via QE was coming.)

NFIB

The National Federation of Independent Business reported a reading that surprised even a Mr. Negative like myself as the price of oil apparently had a harsher effect on the outlook among small-business owners than one may have believed. 

The NFIB’s gauge of small business confidence got hit by 2.6 points for March, falling to 91.9 from the current cycle’s peak of 94.5 for February – the market was expecting a reading of 95.0.

While the capital spending, higher selling prices, plans to increase inventories and easing of credit conditions segments all increased, they were more than offset by weakening in other areas.  (The easing of credit conditions segment exploded to the upside, hitting a level that has never been seen in the measure’s 37-year history, but if firms aren’t optimistic then they’re not going to borrow.)

The expectations of a better economy, higher sales and earnings trends all got wacked and the inventory satisfaction reading also declined – which offsets the positive move in the plans to increase stockpiles segment.  The expectations readings were clearly hit by the surge in gasoline prices as small firms worry consumer demand will be adversely effected.  In addition, the good time to expand and hiring plans segments also declined – both remain well below historically averages.

Bottom line: 

This measure, after spending more time below the 90 level (a sub-90 level has only been hit during deep recession prior to this period) than any time in the survey’s history, was finally beginning to move to levels that offered some inkling that we were headed for normal levels over the ensuing months.  Alas, this latest reading has crushed that outlook as the Fed’s policy is backfiring by helping to push commodity prices higher.

And on that point, while the NEMA tensions are responsible for the last $15/bbl increase in the price of crude, remember we were already at $92/bbl before those uprisings hit – absent a reckless monetary policy that pushed crude back to the $90 handle, we wouldn’t have $100+ crude even with increased NEMA tensions.     The Fed is so out of touch with small business it’s amazing – increasingly evident via the latest speeches from Yellen (FOMC Vice Chair) and Dudley (NY Fed Bank) as they completely scoff at higher energy and food prices.  For those who may not be aware, Bernanke, Yellen and Dudley have the most pull within the FOMC.

Import Prices

The import price index jumped for a sixth month as it showed prices surged 2.7% in March and up to 9.7% year-over-year – the market was expecting 2.1% for the month and 8.6% y/o/y. 

It’s all food and energy as the ex-food/fuels reading rose just 0.3% for the month, but then the consumer can’t really exclude these vital components of life so excluding them (as the Fed likes to do) is not only ridiculous it’s a sham. 

The petroleum segment jumped 10.5% in March after a 4.0% increase in February and is up 31.3% y/o/y.  The food/beverage component rose 4.2% in March after the 0.7% increase in February and is up 18.9% y/o/y.

So the import price index has all but hit double-digit growth again on a y/o/y basis.  The average for the period 1995-2008 (which removed the huge volatility in the reading over the past few years) is 1.6%; the average since 1995 is 1.9% when we include the 2008-present timestep.  So we’re way beyond averages right now.

Trade Balance

The U.S. trade deficit narrowed in February by 2.6%, coming in at -$45.758 billion ($1.8 billion shy of the estimate) following January’s -$46.969 billion.  Both export and import activity decline for the month, but imports fell more than exports as the narrowing in the figure illustrates.  

As we explain each month, the deficit in trade is largely due to our domestic energy policy, which sets a plethora of restrictions on production and forces us to import more energy than we would otherwise need.  Excluding petroleum, the deficit would have been just -$19.942 billion in February. 

On an inflation-adjusted basis, which is what matters for the GDP reading, the deficit narrowed to -$49.463 billion from -$50.251 billion in the prior month.  However, the figure isn’t on track to offset weakness in consumer spending and inventory rebuilding for Q1 GDP as the trade deficit remains 10% wider than it was in Q4, which means it will also drag on growth. 

At this point, we’re probably looking at a 2.0% reading for Q1 GDP – the economy was estimated to grow by many of the most-cited economists at a 4.0% annualized rate just a couple of months ago. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900