U.S. stocks began Friday’s session lower, following overseas bourses the night before, and stayed down as both global and domestic data suggests activity continues to weaken.

Economic data from both Asia and Europe were not helpful as trade figures showed weakening in China, the latest industrial production figures out of India posted substantial deceleration, and UK manufacturing declined at a deeper rate than expected.  And then we had our own import prices data that printed another monthly increase even as petroleum-product prices declined for the first time in seven months – the number was expected to print -0.7%, but rose 0.2% instead.

Utilities outperformed, but closed lower as all 10 major industry groups declined.  Financials were the second-best performing sector thanks to a late-day come back after the Federal Reserve said no mas and hinted that they may not push for even higher capital requirements for the SIFI (systemically important financial institutions).  Energy and consumer discretionary shares led the losses.

For the week, the broad market, as measured by the S&P 500, shed 2.24%, marking the sixth-straight week of decline (and down eight of the past 10 weeks) – it’s the longest losing streak since 2002.  While this latest swoon is the second deepest since stocks have rallied from the nefarious depth of S&P 500 666 on March 2009 (the worst being last spring/summer’s 16% hit), the damage has been mild as the broad market is just 6.8% below the 34-month peak hit on April 29.

For the year, the NASDAQ Composite and Russell 2000 (small caps) are now negative.  Three of the major 10 industry groups are down for the year, with three more flirting with negative territory.

Market Activity for June 10, 2011

Sector Activity for June 10, 2011

Import Prices

The Labor Department reported that import prices for May rose an unexpected 0.2% (expected to declined 0.7%) even as the energy and food components declined.  While the 0.2% increase is not a major move, it comes on the heels of massive 1.4%-3.0% monthly increases over the previous six months.

Import prices are now up a scorching 12.5% year-over-year and up an eye-popping 21.6% annual rate over the past six months. It’s a dollar thing.

These import prices feed into consumer prices a couple of month down the road and erode living standards as incomes have no chance of keeping up.  However, I think we’re about to see the inflation gauges peak out because if the economy continues to weaken from an already lethargic state then these price gauges will begin to ease a great deal.  As we get into the back-half of Q3 and into the final months of the year I think it’s reasonable to expect auto production to increase (as Japanese supply chain issues ease a bit).  While this will boost economic activity a bit, it’s unlikely the economy will accelerate substantially.  Until the Fed rolls out the next round of QE and sparks another round of commodity buying/dollar weakness, the official inflation gauges (not real-world prices, but the stuff financial markets watch) should ease.

Now, that’s hardly a good thing as this economy desperately needs growth – it would be nice to see economic growth of 3.5% and mild and consistent price inflation of 2.0-2.5%, but that is not possible when monetary policy is wildly aggressive.  Instead, we’re stuck in this situation in which little more than 2.0% growth sparks harmful levels of inflation.

Sure, we have economic difficulties that must still be endured, but an aggressive Fed won’t fix it as we should all know by now – only time, pro-growth tax policy and sound monetary policy can cure this issue.  Yet, the Fed’s Keynesian fanaticism won’t allow them to engage in sound policy as they (along with the President’s economic team) continue to clutch to an economic belief that does not work.  This is what has us trapped as the Fed doesn’t seem to understand that a pummeling of the dollar is major element that’s holding us down (and too much government spending holds back the private sector).

At some point the Fed just has to let the cards fall where they may, and we’ll then be able to begin a real growth cycle.  Yes, this means another round of pretty deep trouble.  But there is no way of getting around that.  The more we delay it, the worse it becomes.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900