U.S. stocks shook off the day’s unfriendly economic releases to shoot higher, bringing the S&P 500 to just five points shy of its 34-month high hit on April 29.   But the last two days of gains have been on extremely weak volume, 25% below an already low six-month average.

Of course the general financial news outlets touted Microsoft’s purchase of Skype as the reason for the market’s move higher – the whole increased hope thing that more acquisitions at premium prices will occur.  But I think the move of the past couple of days is more a function of traders quickly learning that capricious margin hikes have become the new tightening (in a world with which our Fed remains addicted to ZIRP/QE).  The signal has been sent, either directly or indirectly (it doesn’t matter), Bernanke has zero desire to end ZIRP.  But much to the chagrin of policymakers,  the quick learning curve wasn’t just evident in higher stock prices but in the commodity markets too, as 17 of the CRB’s 19 components rose in price – sugar, silver, cotton, wheat and gasoline led the index higher. 

Since Bernanke & Co. cannot control where the money goes, even the increased margin requirements on silver and oil isn’t enough to stop the resumption of the trade – and don’t hate the speculators, they’re just responding to the Fed’s aggressive monetary tactics.  Crude edged higher to nearly $104/bbl (sold off to $100 in the morning but bounced back in the afternoon).  Gasoline wasn’t affected in the least (which means we’ll see a margin hike any day now), bouncing 8 cents to $3.36/gallon – that’s 27 cents  in two days and now just 3% from the recent peak.  The national average retail price is $3.96 this morning. 

For a couple of months now we’ve talked about the tightening policy that’s been implemented in Asia.  The region’s policymakers have done so in a fairly measured manner, but it’s been consistent for several months now as is beginning to have an effect.  China’s latest trade surplus widened significantly in April (China usually records a slight surplus or even mild deficit in the first quarter) as their import activity continues to weaken.  What’s been the engine of growth for this global recovery is slowing and will continue to over the next several months. 

Market Activity for May 10, 2011

Sector Activity for May 10, 2011

NFIB

The National Federation of Independent Business’s gauge of small business optimism showed nothing of the kind remains in place.  The gauge slipped another 0.8 point to 91.2 in April (pretty much in line with the weak expectation of 91.8).  This is a mark that’s below the low hit in the 1990-91 recession – even the best number we’ve seen for this cycle (the 94.5 reading hit for February) is below the low point of the 2001 downturn.   The measure has been pegged below the 95 level for 3 ½ years – it’s never spent more than six months below that mark in the past. 

All of the gauge’s sub-categories fell except for two.   Plans to increase capital spending and inventories, expectations of a better economy and higher sales, easing of credit conditions, good time to expand and positive earnings trends, they all fell from already low levels.  The categories that rose were higher selling prices (naturally) and inventory satisfaction.  Higher selling prices have become a necessity wherever it is possible, and inventory satisfaction should be decent as stockpile levels are near record lows – the glaring reality is that firms are unwilling to aggressively build stockpiles even as they are at extreme lows. 

Import Prices

The Labor Department reported that import prices jumped another 2.2% in April (a 1.8% increase was expected) after the 2.6% surge in March.  The import price index is up 11.1% over the past 12 months – clearly a function of a lower dollar value. 

The increase was largely due to the 7.2% jump in petroleum import prices, but when you’ve got the overall index up more than 2% in a single month it doesn’t necessarily mean the other components were tame just because most of the jump was a result of energy. 

Excluding fuels, import prices were up 0.6% in April and 4.3% year-over-year.  There’s been a clear acceleration in the ex-petro figure over the past four months – annualize it and you get 8.2%.  Specifically, the food/beverages component jumped 1.8% after March’s rocket shot of 4.2% -- those are month-over-month numbers.  Year-over-year the component is up 19.6% (largest 12-month change since this data began in 1983) and over the past four months is up 38.4% annualized.  No problem here. 

Now, import prices will surely show a deceleration when the May figure comes out next month as crude prices have come off the recent high – assuming there’s no real bounce over the next couple of weeks.  But we’ll still have the other components, some of which are out of control.    Import prices lead consumer prices.  

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900