U.S. stocks fell by the most in a couple of months (since the 1.9% slide on March 16 to be exact) as the European debt crisis received more attention – it’s not that the situation hasn’t been raging again, it’s just been collectively ignored by global equity markets. 

The Dollar Index is in the process of bouncing back from extreme lows, and stocks don’t like that as it’s a clear sign that some move to safety has occured.  (I’m not saying this is the way it should be – to view a rising dollar value as a bad thing for stocks – it’s just the environment we’re in.  When we’ve got a wildly aggressive Fed chairman at the helm, the greenback will only find life when investors flee riskier assets.)

Telecoms, consumer-related and health care shares were the best-performing sectors, but only because everything’s relative – all 10 of the major industry groups lost ground for session.  Tech, energy and industrials were the biggest losers. 

The CRB Index moved back to the near-term low (initially hit last Monday) as 15 of its 19 components declined – the exceptions were natural gas, coffee, gold and aluminum.  Crude fell back to $97.46/bbl (which nearly erases the MENA-related pop) and wholesale gasoline inched lower $2.93/gallon, but essentially unchanged over the past week.   The national average pump price is down to $3.83 – 15 cents off the high hit little more than a week ago, but still a buck higher than the year-ago price. 

The European debt crisis moved to a new level on Monday as the regional elections in Spain resulted in a rout for the majority Socialist party, which (as the WSJ first reported on Friday) will probably lead to the uncovering of a deeper debt problem than was previously acknowledged.   Interest rates spreads moved to new record wides in Greece, Ireland and Portugal, while Spanish and Italian spreads also continue to widen (the cost of borrowing is getting more expensive relative to benchmark German bunds).

There was also pressure coming from Asia as the slowdown we’ve been talking about for some time now appears to be occurring – a result of their tightening campaign as the region is dealing with the inflation that Bernanke exports.  An index of Chinese manufacturing fell to the lowest level in 10 months and is very close to contraction territory.  The Pacific Rim has been a major engine of growth for this global economic cycle and its weakness will be felt in our manufacturing numbers. 

Market Activity for May 23, 2011

Sector Activity for May 23, 2011

Chicago Fed National Activity

The Federal Reserve Bank of Chicago’s national activity index slid to a reading of -0.45 in April (lowest reading since August) after printing +0.32 in March.  The three-month moving average has turned negative again after managing just three-straight months of positive readings – a number below zero indicates the economy is growing below trend, which we already knew. 

There are numbers one is supposed to watch for at different stages of the business cycle.  The level we’re watching right now is -0.70 on the three-month average, which is supposed to indicate that a recession has begun after a period of economic expansion.

The measure is made up of 85 economic components and 57 of those indicators deteriorated in April.  The production and consumption-related indicators subtracted from the measure as they came in negative, while the employment-related measures made a positive contribution – although a much weaker contribution than in March as initial jobless claims jumped. 

So here we find ourselves in spring again, and just like last year the European debt situation is beginning to take center stage and a number of economic data points are decelerating.  The only differences are we don’t have a major oil-drilling accident in the Gulf of Mexico; the prices of food, energy and building materials are higher; and the stock market is holding up – last spring the S&P 500 slid 16%. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900