The broad market (as measured by the S&P 500) slipped for a fourth session in five but the losses have been mild considering the weak economic data over the past several days – initial jobless claims, retail sales, manufacturing data, and yet more housing numbers, all point to economic deceleration from an already low level of growth. 

Utility, financial and telecom shares were the best performing groups yesterday.  Consumer staples and health care also gained some ground.  Health care, consumer staples and utilities are the leaders quarter-to-date.   Industrials, basic materials, tech and energy were yesterday’s losers. 

The Treasury market continues to act as though the economy is in real trouble, more QE is coming, or both (which is the likely scenario).  The yield on the 10-year is down to 3.11%.   Even this morning as stock-index futures are up nicely, the Treasury market is up too (in price) – yields are a bit lower.  There’s a clear disconnect here and it’s got the expectation of another round of QE written all over it. 

The CRB Index inched lower yesterday (currently 9.2% below the post-crisis high hit on April 29), as the energy complex continues to drag the index lower.  Crude inched lower to $96.95/bbl; wholesale gasoline fell another buck to $2.92/gal. (and in time we should see $3.60 at the pump – Bernanke will say inflation concerns are overdone but you’ll still be paying a high price).  But the agricultural commodities continue to hold the CRB up as the price of wheat, corn, cotton and soybeans rallied again.

As we touched on last week when pointing out for the umpteenth time that developed-country central banks are cornered, here we have U.K. inflation printing 4.5% y/o/y for April (up from 4.0% in March).  Yet, the Bank of England continues to keep monetary policy ultra easing as their benchmark interest rate stands at 0.50% (I guess if this is ultra-easing we can call our zero-bound policy wildly aggressive) and they continue to buy bonds. 

And this is the corner, the box they find themselves in.  Remove the emergency level of accommodation and stock markets will decline (leading to the nasty combination of falling stocks and home values on households).  Keep pumping money into the system with reckless abandon and what looks to be an easing in inflation pressures over the past couple of weeks will rage again to clock consumers.  At some point, you just have to get on with it and allow the inevitable to occur. 

Market Activity for May 17, 2011

Sector Activity for May 17, 2011

Housing Starts

Builders broke ground on far fewer homes than expected in April as starts slid 10.6% to 523,000 at a seasonally-adjusted annual rate (SAAR) – the number was expected to come in at 569K.  Now, this does follow a big upward revision to the March data, coming in at 585K when starts were initially reported to have risen to just 549K.  However, this latest reading is still the fourth-lowest print on record (a record that goes back to 1959).  

The permits number, which is an indication of housing starts over the next couple of reporting months, fell 4.0% to 551,000 – expected to rise 0.9%.  That was off of a 574,000 reading in March that was revised down from the 594K reported last month. 

Industrial Production (IP)

The Federal Reserve reported that industrial production flat lined in April even as the utility and mining segments showed powerful monthly increases in activity – up 0.8% for mining and 1.7% for utilities.  So that means that the all-important manufacturing segment (which accounts for 75% of the overall IP index) saw activity decline.

IP came in unchanged for April after a downwardly revised 0.7% increase in March.  The index was pressured by the first decline in manufacturing production in a year (down 0.4%) and the largest drop since March 2009 when industrial production was in its post-financial crisis slide. 

The decline should prove temporary as the auto sector pressured the manufacturing sector with its 8.9% production plunge – a function of supply chain issues in Japan.  Still, even when excluding the vehicles & parts component manufacturing production has shown a clear deceleration – down to 4.4% y/o/y growth as of April from 6.0% in March and 6.5% in February.  

Capacity utilization slipped 0.1 percentage point to 76.9%, which will continue to give the Fed room to engage in their wild QE experiment.  Bernanke has cited this figure as one of the key areas he is watching and so long as it remains below the long-term average (see chart) it provides him cover to monetize the debt and levitate the stock market. 

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Have a great day!

Brent Vondera, Senior Analyst