U.S. stocks extended upon Friday’s decline but it apparently had nothing to do with the troubled labor market, rather renewed worries from overseas.

Pressuring pre-market futures was the latest inflation print out of China (up to 6.4% y/o/y in June from 5.5% in May) and the farce that is the EU bailout program that’s coming to light.

China is in a tough spot here as their manufacturing sector decelerates, yet inflation rates continue to rise – that soft-landing the market has been counting on is becoming more difficult to imagine.

On the EU thing, and surely what caused traders the most angst, finance ministers convened but failed in their attempt to smooth out divisions over the proposed “solution” for Greece. What is suddenly being talked about is the ECB (central bank) stepping in and buying government bonds – they’ll do anything to escape default and by doing so we’ll watch the increasing manipulation of markets.  Additionally, people are beginning to think about Italy – why it took so long I have no idea.  This is a country that faces a formidable redemption schedule as it needs to refinance 40% its debt over the next 18 months and 55% through 2013.

To rattle heads a little more, the U.S. debt ceiling talks broke down over the weekend, which wasn’t all that surprising since one side still thinks they’ll get higher tax rates and the other is holding out for reductions.  In the end, as we approach the August 2 deadline (which really is a hard deadline as the Treasury re-funds its debt – meaning we borrow to pay off maturing bonds) Congress will likely come to some agreement at the last minute.  Not that this agreement will address the underlying problem though as the can gets kicked further down the road – which is all the rage these days.

Consumer staple, utility and telecom shares outperformed – although event these groups closed lower for the session.  Financials, consumer discretionary and basic material shares took the brunt of the damage.

Naturally, the CRB Index slipped as most of the commodities in the basket declined in price.  Cotton, OJ, aluminum and wheat prices fell the most.  The energy complex decline too, but just slightly – it would be nice on close to a 2% down session for stocks that oil and gasoline fall by a meaningful amount.  No, crude closed at $95/bbl and wholesale gasoline at $3.06/gal.

Market Activity for July 11, 2011

Sector Activity for July 11, 2011

This Week

We were without an economic released on Monday, but this morning we get the economic week started off with the NFIB’s latest reading on small-business confidence for June (expected to rise but remain at recessionary levels) and the trade figures for May (the trade gap is expected to widen, which won’t help Q2 GDP – and man will it need help).

Later in the week we receive inflation data (import prices, producer and consumer prices) for June, retail sales for June, the weekly tradition that is jobless claims and industrial production.

The most important of these data will be initial jobless claims (as the labor market has taken a turn for the worse, which the 13-straight weeks of initial claims over 400K have predicted) and retail sales.

We desperately needed claims to fall below the 400K mark to indicate that July jobs will stage a snapback, and retail sales to manage a strong inflation-adjusted increase.  I’ve got no idea of the former, but the latter is unlikely to offer us a good number.  Real (inflation-adjusted) retail sales have been negative for two months now and the June result is probably going to make it three.  Even the core reading, which funnels into GDP, is flat on an inflation-adjusted basis – the only thing that will help Q2 remain above 1.0% is inventory rebuilding, which is not the way you want it to play out.

Then, the industrial production reading will also get attention.  This number has been net negative for the first two months of the second quarter, but the June results should provide the three-month average a little boost.

Those inflation gauges are probably not going to be market-movers as the economic deceleration forces these figures lower.  Still, the consequence of QE policy makes it very tough for the economy to expand at anywhere close to 3.0% without firing commodity prices and thus overall inflation.  This is what we get when the Fed attempts to aggressively (like never before) prop up this economy.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900