U.S. stocks began the session lower as the session began with a risk-off mindset and the pre-market economic data releases missed expectations.  But things turned a couple of hours into trading as the Dollar Index (DXY) crossed into positive territory.  (We’ve gone over this relationship in the past, it’s part of the whacky world we find ourselves in as computer-generated trading is set to go “risk on” as the dollar falls. 

Although the whole “risk on” thing appears to have tamed a bit as the safety trade reigned again yesterday.  Consumer staples, health care (best-performing sector YTD) and telecoms led the broad market higher.  Financials (worst-performing sector YTD), energy and basic material shares were the laggards. 

The commodity complex gained a little ground after Tuesday’s big sell off.  The components that people care about most right now (oil and gasoline) ended mixed.  Crude inched higher to $98.65/bbl, while gasoline slid another six cents to $3.06/gal.  Wholesale gasoline is down 40 cents over the past two weeks, but as we discussed a few letters back, don’t expect much relief at the pump as the retail price lags and never exhibited the degree of increase that occurred at the wholesale level.  It will be coming down, but to expect a 40-cent decline is probably wishful thinking.   Bernanke will cite this move down in price as a sign that inflation is not an issue, but we’ll still be stuck with $3.50+ at the pump. 

The EU got Finland to acquiesce to the Portugal bailout, but with what seems to be a pretty big condition for a market that’s become accustomed to government backstopping and the suspension of risk.  The Finns demanded that bailed out nations (currently number three in a 12 month period) engage in state asset sales and EU donor countries get their loans repaid before private investors. 

Market Activity for May 12, 2011

Sector Activity for May 12, 2011

Jobless Claims

The Labor Department reported that initial jobless claims came down from the sky high-for-an-expansion reading of 474K of the previous week, but remained at a level that suggests payroll growth will slow over the next couple of reporting months. 

Initial claims fell 44,000 to 434,000 for the week ended May 7, a bit higher than the 430K that was expected.  So while this is down from the outsized 474K in the prior week, the four-week average sits at 436,750, up 4,500 from the previous week.

Continuing claims were lower on balance as the standard issue (covering the first 26 weeks of joblessness) rose 5,000 to 3.756 million, while emergency-level of claims (that extend out to 99 weeks) fell 17,100 to 4.104 million.

Producer Price Index (PPI)

Producer prices surged 0.8% in April (expected to rise 0.6%) after the 0.7% jump in March.  Excluding food and energy, something only a foolish Fed would do but I’ve got to report on it, PPI was up 0.3%, following the 0.3% increase in March.  Year-over-year, headline PPI is up 6.8%, from 5.8% in March, and the core rate (ex-food and energy) is up 2.1%, up from 1.9% in March. 

While lower commodity prices over the past couple of weeks will result in a mild PPI reading for May, the trend over the past few reporting months has been ugly.  Over the past six months, headline PPI is up 11.4% at an annual rate; core PPI is up an annualized 3.7%; and for the kicker, crude PPI (goods used in the initial stage of production) is up 41% at an annual rate. 

Retail Sales

Retail sales rose 0.5% in April, missing that expectation of 0.6%. However, the expectations miss really didn’t matter as the March figure was revised up big time to show a 0.9% surge.   Although, one assumes that most of this two-month increase was a result of higher prices and high tax refunds rolling in thanks last year’s $8,000 homebuyers tax credit. 

Excluding gasoline the data shows a different picture as sales were up just 0.2% and follows a 0.5% increase in March.  Exclude autos, building materials and gasoline (what’s known as core sales and important for GDP) and sales were also up 0.2% after a 0.6% increase in March. 

Business Inventories

Inventories rose 1.0% in March, a bit higher than the 0.9% expected.   This concludes a three-month period in which with inventory building was nicely higher than that of the previous quarter, so as we say in the initial estimate of Q1 GDP, it added nearly a percentage point to the weak overall reading of 1.8%. 

What the March data shows is the actual result was a bit stronger than the expectation and thus will make a slightly larger contribution to the GDP figure.  However, the past couple of days worth of data have also shown that trade (net exports) will have a larger drag on Q1 GDP.  The drag from trade appears to be larger than the boost inventories will provide so the GDP revision (to be released on May 26) looks like it will be revised lower. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900