U.S stocks had a tough session, erasing the prior day’s gains and then some, as European debt concerns returned – the Financial Times reported that the European Commission believes a restructuring of Greek bonds (investors eat losses) would be a default, force another banking-sector bailout and possibly a run on banks.  These are things we’ve been discussing for a long time, but the market doesn’t always want to acknowledge the reality.  Then there’s the day’s economic data, which didn’t help matters (more on that below).

Even with the degree of yesterday’s decline, it wasn’t even the deepest daily move in month as the June 1 decline was -2.28%.  The bulls may take a little optimism from the day’s activity as it never approached a 2.50% slump, much less one of the 5%ers that really puts the scare in people.

Utilities, health care and telecoms outperformed (which means they were down the least).  Energy, basic material and financials led the losses.

Stocks were down so that means commodities followed, led by the prices of cotton, gasoline (down 13 cents to $2.93), crude (down $4 to $95 and the lowest level since Egypt erupted) and corn.

The Dollar Index rallied as the euro got crushed.

Market Activity for June 15, 2011

Sector Activity for June 15, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rallied 13.0% last week following two weeks of decline.  The index was fueled by a 16.5% jump in refinancing activity as the average contract rate on the 30-year fixed fell three basis points to 4.51%.  Purchases rose too, up 4.5%, but buying activity has been sporadic and much too weak.  The housing market needs consistent sales growth, which is not going to occur so long as potential buyers believe prices will continue to decline and the unemployment rate remains stuck at an elevation rarely seen.

CPI

The consumer price index rose 0.2% for May (0.1% was expected) after the 0.4% increase in April – so the 0.2% increase breaks of five-month string of 0.4%+ m/o/m increases.  The y/o/y figure rose to 3.6% from 3.2% in April – that’s the highest level since the financial crisis hit and well above the 25-year average of 2.9% (and even a touch above the 30-year average of 3.5% that is affected by the double-digit inflation rates of the late1970s/early1980s).

The CPI increase occurred even as the gasoline component fell 2.0% for the month.  Exclude energy and CPI was up 0.3% for the month.  Jumps in the vehicles (both new and used), apparel and recreation (hotels) components helped to spur the ex-fuel increase.

But as we mentioned in yesterday’s letter, these inflation gauges are lagging indicators and due to the economic deterioration (along with some pull back in commodity prices) if this isn’t the near-term peak in CPI, then we should see it in June.  From there, the inflation gauges should begin to ease again; however, all bets are off the table when the Fed rolls out the next round of QE --- that will jolt commodity prices again.

Industrial Production (IP)

Industrial production rose a scant 0.1% (expected to rise 0.2%) in May as a large 2.8% decline in utility production hit the overall number.  Manufacturing production (accounts for 75% of the IP index) rebounded from 0.5% decline in April.  Auto production sank 1.5% last month, but it wasn’t enough to pull all of manufacturing down for the month as total factory production rose 0.4%.

Capacity utilization, or the percentage of plants that the economy is using, held at 76.7% in May (same as April), which is about 5% below the long-term average.  This is one thing the Fed is watching and so long as this reading remains below average, they’ll continue to cite it as a reason to keep policy extremely easy – even as the y/o/y headline CPI has been running above their stated “comfort” level.

Empire Manufacturing

The first regional factory report for June punked out.  The Empire Manufacturing survey for June slid to contraction mode, falling 19.67 points to a reading of -7.79 – it was expected to rise a bit to a reading of 12.00.

Four of the survey’s sub-indices fell to contraction mode as new orders slid 20.8 points to -3.61; shipments collapsed 33.8 points to -8.02; delivery times fell 5.2 points to        -3.06; and the average workweek plunged 25.7 points to -2.04.

Price paid fell 13.8 points to 56.12, but prices received fell more, down 16.7 points to 11.22.

So people continue to blame the significant deterioration that’s occurred on the Japanese supply-chain disruptions.  No doubt that’s playing a major role, particularly within the auto sector.  But that industrial production reading showed a 0.4% increase in factory production in May even as auto assemblies slid 1.5%.  Thus, even a meaningful decline in autos didn’t cause the total production to fall.  That tells me there was something else going on that hit New York-area manufacturing.

NAHB Market Index

The National Association of Homebuilder’s Market Index (a measure meant to gauge optimism among homebuilders) fell to a reading of 13 June from 16 in May.  A reading below 50 means that more builders saw conditions as “poor” than those responding that conditions were “good.”

A picture’s worth a thousand words:

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900