U.S. stocks managed to break a four-day losing streak, but for the broad market, just barely.  Traders just don’t seem all that impressed with first-quarter earnings season, but it is early days as reports don’t start flowing in earnest until next week.  The NASDAQ Composite was the star for the day as tech was the outperforming sector. 

Utilities, consumer (both discretionary and staples) and energy were the other sectors to close higher for the session.  Financials and basic materials were the sectors worst hit, with telecoms, industrials and health care also down for the session. 

The price of crude bounced back to the $107 handle and wholesale gasoline jumped seven cents (it had fallen 10 cents over the previous two sessions), resulting in a closing price of $3.24 – a level that keeps the $3.80/gallon pump price in play. 

In fact, the entire commodity complex (as measured by the CRB Index) gained backed a little ground as the prices of coffee, hogs, silver and the aforementioned energy components offset weakness within the industrial metals.  The CRB Index is currently 2.6% below its post-bubble peak hit on Friday. 

Market Activity for April 13, 2011

Sector Activity for April 13, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell for a third-straight week, and is down seven of that past 10.  Both refinancing and purchase activity declined.  The average contract interest rate on the 30-year mortgage rose five basis points to the extraordinarily high level of 4.98%.

I’m joking of course about that 30-year fixed rate, but the fact that sub-5.00% can’t spark a housing revival shows just how structurally weak the environment is.  In addition, the entire economy, let alone the housing market, has become conditioned to these ultra-low rates and that spells trouble whenever it is that the cost of borrowing normalizes. 

Refinancing activity fell 7.7% in the week ended April 8 – down 62% since October when that 30-year mortgage rate hit its record low of 4.21%.  Applications to purchase a home fell 4.7% last week -- down 34.2% since April 2010 when the tax credit expired. 

Retail Sales

The Commerce Department reported that headline retail sales rose 0.4% (expected to come at 0.5%) after a strong 1.1% increase in February.  Excluding autos, sales were up 0.8%; excluding autos and gasoline sales were up 0.6%; excluding just gasoline sales were virtually non-existent at +0.1% -- the price of gasoline is smothering spending in other areas. 

Core retail sales (ex gasoline, building materials and autos) were up 0.4%.  However, assuming the CPI comes in at the 0.5% rate expected for March (a number we’ll get tomorrow), inflation-adjusted core retail sales fell 0.1%.

And that’s really the key thing to think about now that cost-push inflation (commodity-price driven inflation) is beginning to post some big numbers.  CPI is up 5.6% at an annualized rate over the past three months, and PCE (the inflation gauge tied to the personal spending component of GDP) is on pace to rise 5.0% annualized for the first quarter. 

So even if the official spending number (which comes out at the end of the month) rises at double the rate of retail sales for March, then the largest component of GDP will come in at a rate that’s 30% below the 25-year average and much too low to offset the drags  inventories and trade will have on GDP.  We’ll be lucky to get a 2.0% GDP number for the quarter, which means the economy will have grown at a 2.4% real rate over the past year, down from the 2.8% over the previous four quarters – and all with ZIRP/QE on parade.

Business Inventories

Commerce also reported that business inventories rose 0.5% in February, coming in shy of the 0.8% expected that was used for even the reduced Q1 GDP estimate.  Sales rose just 0.2% during the month, which is the weakest result since the 0.5% decline in June 2010. 

So besides the weaker-than-expected inventory build for February, it is unlikely businesses were aggressively increasing stockpiles for March due to the low Feb. sales data.  As stated, the inventory component is on pace to drag meaningfully on last quarter’s GDP print.

The past couple of days have not been kind to growth expectations, which brings me back to the interest rate commentary from yesterday.  Despite the current inflation realities and sorry levels of government debt, the economy is simply too weak for the bond market to overwhelm the Fed and force rates much higher.  In fact, traders may just continue playing the quick profit game (buying Treasurys ahead of the Fed) as, after some period of respite, the Bank of Bernanke will employ another round of QE – guessing sometime in early 2012. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900