U.S. stocks traded pretty calm for most of the session even as commodities and currencies exhibited wild trading, but then in the final hour stocks began to gyrate and close near the lows of the day.

For most of the session I found it eerie how calmly the stock market traded with the serious moves occurring in the commodity and currency markets.  Add on the fact that initial jobless claims jumped to a level that’s way too close to the 500K mark and the calm activity was all the more strange.  Yes, everyone knows the Fed is there to backstop weakness (The Bernank will whip the QE card out of his pocket again when needed), but still.  In that final hour though, stock market activity got more interesting and frankly a little apropos for eve of the one-year anniversary of the flash crash. 

Despite all the talk of interest rates rising as QE2 nears its end, we see that yields are crumbling again.  The yield on the 10-year Treasury fell below the 24-month range (a range that excludes the traders’ rush that occurred prior to QE2 – I exclude that because it was even more a function of a manipulated market than what we’ve been dealing with since Bernanke began his stroll down the road of large-scale asset purchases. 

The CRB Index extended its decline from last Friday’s post-crisis high, currently off by 8% from that peak.  Crude got slammed by $10/bbl to $99.06 and gasoline by 24 cents to $3.09/gallon. 

This index that tracks a number of commodity prices has engaged in six prior declines of roughly 7% or greater over the past two years.  Thus, one can’t view the current weakness and deduce that the ultimate slide is on.  The end of the current commodity cycle is unlikely to occur until the Fed begins to reverse the course of monetary policy.  That doesn’t mean the end of QE, but when they actually begin to drain liquidity (reduce their balance sheet) and push fed funds above the zero bound. 

As we talked about yesterday, the ECB held their benchmark interest rate steady at 1.25% after hiking it for the first time in nearly three years and made no mention of a June hike.  While many people seemed to believe the ECB would hike again in June (evident by the rising euro even as the EU debt contagion remains in full effect), it just wasn’t reasonable to think they’d tighten as Europe has recession written all over it.  German growth is keeping the zone’s economic activity on an upward trajectory, but more European countries weaken by the quarter – and even Germany had a really bad factory orders release yesterday. 

The Dollar Index bounced on that news as the euro took at hit.  It was actually Trichet’s (ECB president) comments, or lack thereof, that sparked the decline in commodity prices.  He removed the term “vigilante” from his latest text (vigilante on inflation) and that’s what ultimately pushed the euro lower/dollar higher.  That began the decline in crude and from there traders rushed to get out of the commodity trade. 

Jobless Claims

The Labor Department reported that initial jobless claims climbed 43,000 to 474,000 (expected to fall to 410K).  We’ve seen initial claims move in the wrong direction for four weeks now as they popped back above the 400K level, but this move takes the scenario to another level. 

The four-week average rose 22,250 to 431,250 – that’s the highest level since November. 

Continuing claims (or those on benefits for longer than two weeks) were mixed as the standard issue (which covers the first 26 weeks of joblessness) rose 74,000 to 3.733 million, while emergency claims (extend to 99 weeks) fell nearly 43,000 to 4.121 million. 

There were certainly a couple of variables that wouldn’t get picked up by the seasonal adjustment and thus caused this jump in initial claims.  Two of the more reasonable issues were auto supply disruptions due to the Japanese quakes (which caused U.S. plant shutdowns) and maybe even tornado activity.  But the Labor Department also mentioned a spring break holiday in New York (I don’t get that one at all) and new emergency benefits in Oregon as boosting claims.  However, neither of these states were on the report that lists the states that recorded the largest increase in claims.   And beyond the possible one-time factors, none of this explains the upward trend in claims that’s been in play for a month now. 

Same-Store Sales

The International Council of Shopping Centers (ICSC) reported that same-store sales jumped 8.5% in April from a year ago after March’s 2.0% increase. 

The gain was led by an 11.9% bounce in apparel sales, after March’s 1.6% decline, and an 11.6% gain from wholesale clubs (although exclude gasoline and sales were up half that amount), which follows a 12.1% surge in March. 

Tax refund checks have likely helped (don’t forget all of those home buyers tax credits that boosted refunds) and the fact that Easter fell late in the month also contributed – retailers explicitly mentioned this. 

As a result of the Easter Holiday, it makes sense to average the past two months’ results.  On this basis, year-over-year results remain strong at 5%.  Since this doesn’t jibe with the weakness the ISM service-sector reported on Wednesday, we’ll see how May turns out.  I’ve got a feeling tax refunds helped more than anything in April. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900