U.S. stocks closed higher on balance yesterday after spending most of the session in negative territory.  The Dow Industrials and S&P 500 managed to eke out another slim gains (two days in a row) but the NASDAQ failed to close positive as tech shares weighed on the index – the sector is about 6% off its 39-month high hit on February 17.

For the broad market, energy, consumer staples, health care and utilities led the S&P 500 higher.  Financials, the aforementioned technology, and consumer discretionary sectors closed lower.

The day’s economic reports weren’t exactly helpful as initial jobless claims bounced back above the key 400K level and producer prices continue on an unpleasant trajectory, which rounds out three days of data that points to much weaker-than-expected Q1 growth and suggests the Fed will be faced with either stagflation or profit margin compression over the next couple of quarters.  (In addition, it looks like we’ll see more policy tightening out of the Asia as China printed year-over-year inflation of 5.4% last night.)

The Dollar Index fell for a fourth day in five to close at 74.70 (began the year at 79, or 5.4% higher), as the greenback declined in value against every one of the six foreign currencies in the basket. 

The CRB Index inched higher, currently just 2.1% off the post-crisis peak hit last Friday even as Goldman had been out lowering their forecasts for oil and copper – the prices of precious metals, oil, natural gas, cocoa, OJ, hogs and cattle led the move.  Crude finished at higher to $108.22/barrel; wholesale gasoline down a bit to $3.23/gallon – although up again this morning; the national average at the pump is $3.82.

Market Activity for April 14, 2011

Sector Activity for April 14, 2011

Jobless Claims

The Labor Department reported that initial jobless claims jumped 27,000 to 412,000 in the week ended April 9 – a decline to 380K was expected.  The prior week’s reading was revised up 5K to 385K. 

The four-week average rose 5,500 to 395,750.

Continuing claims were mixed as the standard issue (that cover the first 26 weeks of joblessness) fell 58,000 to 3.680 million, while emergency level of claims (which extend out to 99 weeks – and BTW expire at the end of 2011) rose 40,078 to 4.310 million. 

So total continuing claims held below that eight million mark, although just barely at 7.99 million, but initial claims were unable to hold below the key 400K mark.  Since finally falling below 400K  beginning in early February, we’ve popped above that mark three times now – the weeks of Feb. 11, March 4, and now last week.  The point is, we’re still trending right around 400K with really not much conviction that initial claims are able to move down to 350K – a level that offers an absolute green light that the very needed 300K in monthly job growth is on its way.  This 400K range suggests 200K at best and probably something below that on average. 

Producer Price Index

The producer price index (PPI) printed 0.7% for March (less than the 1.0% increase expected) after the 1.6% for February.  Over the past year, PPI is up 5.8% (6.1% was expected) after the 5.6% in February.  While these numbers were better-than-expected, PPI is up 11% at an annual rate over the past six months, and up 13% annualized over the past three months. 

The core rate, which excludes the things you need the most, rose 0.3% (0.2% was expected) after the 0.2% increase in February.  This core rate is up just 1.9% annualized over the past six months but has accelerated to a 4.1% rate over the past three months. 

Further up the pipeline, I like to keep an eye on crude PPI (goods used at the initial stage of production) and that number fell 0.5% for the month.  While down for this latest month, it follows massive increases over the prior three months of 3.4%, 3.3% and 6.4% -- those are month-over-month numbers.  Crude PPI is up 44.1% at an annual rate over the past six months and 27.3% over the past three. 

These results either flow into consumer prices or firms eat these costs.  Either way it presents a big problem for the Fed.  If these costs are passed on to the consumer, then we’ve got stagflation on our hands.  If the firms eat these costs, then profit margins will compress – which means the peak-earnings analysis that is conventionally used to value the market is overstating its attractiveness. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900