U.S. stocks rallied for the first session in seven as the latest trade figures offered a little support (more on this below) and it didn’t take long (about 42 hours) for the Fed to respond to the market’s unfavorable reaction to Bernanke’s speech on Tuesday.

The # 2 at the Federal Reserve (Janet Yellen) presented a speech in which she stated the Fed will use its policy tools to support the economy.  While that’s a reality with which everyone’s fully aware, she also stated that the central bank was working on alternative to the foreclosure problem.  As we should know by now, such policy will only prolong the housing malaise, but this market will take those comments and run with them.

Basic material, energy and health care shares led the broad market higher.  Telecoms and tech were losers in relative terms, but all 10 of the major industry groups did close higher.

Big moves in the prices of corn, cotton, silver and hogs helped to propel the CRB Index higher – although flat since March due to the early-May slide.  The components tha people care the most about also rose as oil bounced to $102/bbl and wholesale gasoline to $3.04/gal.

Market Activity for June 9, 2011

Sector Activity for June 9, 2011

The ECB and BoE (central banks for the EU and Britain) left their benchmark interest rates unchanged yesterday.  It was never expected that either central bank would raise their benchmark rate at this meeting, but it was the wording from Trichet that most people were listening for as the signal they’ll raise again at the next meeting in July.  And Trichet uttered the “strong vigilance” (on inflation) phrase, which was that signal people were listening for.  However, the ECB didn’t raise their inflation forecast for 2012, combined with the financing woes (don’t call it default) within the peripheral economies, it appears the the market came away with the expectation that there will be no rate hike from the ECB in July, even though Trichet talked tough.  For the BoE, forget any rate increase as they are leaning toward more QE.

For our Fed, we need to get to raising the fed funds rate back to 1.00% so that we at least remove the super-emergency level of accommodation. Of course this is not going to happen as all QE would have to be called off first, which I expect Bernanke is not about to do.  As we look down the road, I’m sure readers will wonder several months from now why I was calling for rate hikes for all this time as things will be collapsing again.  The reason is this wildly aggressive monetary policy is not helping, in fact it’s hurting in a number of ways.  Besides, at some point you just have to get on with it, let the chips fall where they may and allow the market to complete the healing process.

Jobless Claims

The Labor Department reported that initial jobless claims came at 427,000 (expected to fall to 419K), up 1,000 from the previous week’s upwardly revised 426,000 (previously reported at 422K).  This is the ninth-straight week above 400K.

The four-week average fell 2,750 to 424,000.

Continuing claims fell another 123,000 (down 71K on standard claims and emergency claims fell 52K) to 7.709 million.

So initials remain stuck well above the 400K level and suggest that the improvement in continuing claims means that more people are coming off of benefits due to expiration of those benefits rather than employment (or at least full employment as we’ve seen the full-time number of workers decline again and part-time work increase).

Trade Balance

The trade gap narrowed substantially in April as exports outpaced imports – the gap was expected to widen.  The figure narrowed $3.144 billion, or 6.7%, to $43.68 billion from the $46.824 billion in March.

Exports rose 1.3% in April and imports fell 0.4%.  Much of the decline on the import side was result of big fall offs in crude and autos – the former due to a drop off in demand and the latter to the Japanese quake/tsunami.  The decline in crude import volumes overwhelmed a 10.7% surge in the price the U.S. paid – $103.18/bbl vs. the $93.76/bbl paid on average in March.

When adjusted for price, which is the figure that matters for GDP, the trade gap narrowed by $5.422 billion, or 11%.  The import side gets uglier as imports slid 3.1% in real terms.  In fact, total trade activity looks worse as real exports rose just 0.8% -- so we see that much of the activity was due to price increases.

For the Q2 GDP number, if the real (inflation-adjusted) trade gap continues to narrow for May and June it’s going to help that figure.  But remember what we talked about in Monday’s letter.  This is what we see when the economy begins to weaken again, exports begin to outpace import activity as domestic purchases slow.  This helps GDP for a couple of quarters, but unless the increased weakness in domestic activity is transitory (as Bernanke likes to say), then export growth will surely follow.  When both are in decline, it’s a symptom that not only domestic growth is weakening but global activity too.

Wholesale Inventories

The Commerce Department reported that distributors’ inventories rose 0.8% in April, the fifth-straight month of increase.  We’ll get the business inventories report next week, which is the one that matters for GDP, but this reading is a good indication of what we’ll see.

Sales rose just 0.3%.  This does follow a big 3.0% increase in March, but one doesn’t expect sales to print such a soft result since this is not a price-adjusted number.  And excluding petroleum, wholesalers’ sales fell 0.1%, the second decline in three months.  Over the past three months, sales growth is half was it was in the prior three-month period.

One expects inventories to continue to help GDP (although I’ve got to add that the ex-inventory GDP readings are pathetically weak, by far the weakest recovery in the postwar era, which illustrates a lack of demand) simply because inventory ratios remain near record lows.  But because the sales figures have weakened, it’s not surprising to see stockpile rebuilding remain at this lower level (inventory rebuilding peaked out in the third quarter of 2010).

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900