U.S. stocks began to lose ground Friday a couple of hours into the session as concerns over Europe’s debt situation picked up again – more people are beginning to see that various attempts to make this problem go away is nothing more than kicking the can down the road.  Increased tensions in the Mideast didn’t help matters as trouble surrounding Israel picks up again. 

The traditional areas of safety continue to lead the way as consumer staples, health care and utilities were among the out-performing sectros, but even these lost ground.   Financials, basic material and tech were the hardest hit. 

For the week, the broad market slipped 0.18% -- no big deal but is the second week of decline after the 1.72% loss for the five sessions ended May 6. 

The CRB Index ended pretty much flat as the energy complex and agricultural commodities gained a little ground to offset losses in the precious and industrial metals.  Oil and wholesale gasoline prices are lower this morning, but the average retail price of gasoline remains high, down to just $3.95/gallon this morning. 

Well, the EU/IMF bailout plans just got a bit more interesting this weekend – finance ministers are scheduled to meet this week in order to agree on yet another iteration of the bailout plan; Greece is expected to plead for even more financial help.  As most of you surely know by now, IMF Chief Dominique Strauss-Kahn (DSK) was arrested in NYC this weekend on charges of sexual assault.  Assuming DSK wasn’t actually chasing the staff around a swank hotel, the fact that these guys are chillin’ in $3,000/night hotel suites illustrates the problem with these organizations – we know longer have the time or money for these organizations.  

Many will ask what then will happen if there’s no group around to bail out troubled governments?  The answer:  No one.  If a government can no longer meet its financial responsibilities then they’ll just have to default and their debt restructured.  At which point, we can return to a world in which risk is properly priced.  That’s what will happen.  And the global financial system will be stronger for it.

Market Activity for May 13, 2011

Sector Activity for May 13, 2011

Consumer Price Index

The Labor Department reported that consumer prices rose 0.4% in April, which follows the 0.5% move in March and marks the fifth-straight monthly increase of at least 0.4.  On a year-over-year basis the CPI came in at 3.2%, which is above the Fed’s stated comfort zone of roughly 2.5%.  Over the past six months, I don’t want to focus on a three-month look because it is overly influenced by the spike in oil prices that has now evaporated, the CPI is up an annualized 5.1%. 

Take food and energy out of the mix, as the Fed likes to do, and consumer prices were up 0.2% last month and 1.3% y/o/y – all of these numbers were in line with expectations.   But these items have been on a roll for a while now, so excluding them is a stupid thing to do – unless you’re more interested in monetizing government debt than price stability.  The food component is up 5.2% at an annual rate over the past six months and motor fuel has surged an annualized 61%.

Average hourly earnings rose 0.1% in April, so with the 0.4% increase in CPI real hourly earnings fell 0.3%.  That’s four months out of five in which wages have failed to keep up with inflation -- and if not for January when hourly earnings simply matched the rise in CPI, real wages have been negative since November. 

U of M Sentiment

The University of Michigan’s preliminary reading of consumer sentiment for May rose 2.6 points to 72.4.  That’s the highest reading in four months, but remains low and is below where it was a year ago. 

The figure was completely driven by the expectations reading (what consumer think about business and their own financial conditions a year out) as the current situation reading was unchanged.  I’ll go over these readings in depth when the final revision is released at the end of the month. 

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Have a great day!

Brent Vondera, Senior Analyst