U.S. stocks bounced to a nice gain briefly mid-afternoon, after shaking off morning-session weakness, but succumbed to pressure in the final hour to close at the session’s low.

That mid-afternoon rally occurred just after the latest FOMC minutes were released at 1:00CDT, the market caught some bids as the text of what the Committee discussed at its latest meeting reminded traders that additional QE remains in play.   (I doubt traders ever really forgot this, but the news more or less reinforced the reality that the Fed isn’t going anywhere just yet…more on this below.)  However, that relative optimism failed to hold as European debt woes, slowing activity out of Asia and our own weak data sent the broad market back down for good.

Utilities and health care were the only groups to close higher.  Industrial, tech and consumer discretionary shares led the losses.

Oil and gasoline broke a two-day decline to rev back up to $97/bbl and $3.10/gal., respectively.  The national average price at the pump is back to $3.64.

Market Activity for July 12, 2011

Sector Activity for July 12, 2011

NFIB Small Business Optimism

The latest from the National Federation of Independent Business showed that their gauge of small-business optimism slipped slightly in June, coming in at a reading of 90.8 after the 90.9 for May.  The reading was expected to rise to 91.2, but more important than the expectation miss is that two years into this expansion small business sentiment remains at recessionary levels.   This gauge was created in 1974 and since that inception the gauge has never been held below a reading of 95 for so long.  It’s been below that mark for 43-straight months – the prior record was 18 months.

Let’s just start with the good news.  The plans to hire, plans to increase capital spending and easing of credit conditions components all rose.  They remain at depressed levels, but they did rise in June.

However, higher selling prices, expect a better economy, expect higher sales, and a good time to expand all fell.  And the expect a better economy slid to a troubling level as it has collapsed again over the past eight months – this calls into question the slight improvement in the plans to hire reading; maybe that increase was more about hope than anything else.

The NFIB reports on what the single most important problem was for small-business in a given months and respondents (766 business owners responded in June) stated that poor sales results remains the number one issue.

Trade Figures

The trade gap widened big time to $50.2 billion in May (blowing away the expectation of -$44.1 billion) from the -$43.6 billion in April.

The inflation-adjusted trade gap, which is the figure that ultimately matters for GDP, widened to -$47.8 billion from -$43.9 in April.  This figure adjusts for the price rise within all components, but the one that sticks out the most was the bump in oil during the month as the U.S. paid $108.70 per barrel, up from $103.18 in April.  The total inflation-adjusted gap is narrower relative to where it came in for the first quarter, so it will help GDP a bit but not by as much as previously expected.

Unless the gap narrows significantly in June, second quarter GDP will rely mostly on inventories again – business spending will contribute very little and the largest component of GDP (personal consumption) looks to be very soft.  The nominal trade gap probably narrowed in June as we know that oil prices fell back to $100/bbl, but the inflation-adjusted number may need an actual boost from the export side – or less beneficially, a collapse in imports.

Exports may have shown the weakness that’s set in within the Asian region and the troubles Europe is dealing with as the figure fell 0.5%.  Computer & electronics, commercial aircraft and auto exports looked pretty good but industrial supplies and consumer goods were weak – and adjusting for price, exports fell 1.5%.

Imports jumped 2.6%, but it was mostly those petroleum imports that drove the figure.  Exclude petro and imports rose just 0.9%. Adjust for prices and exclude petro and imports were nearly flat.

Fed Minutes

The FOMC (Federal Open Market Committee – the group that determines monetary policy) released their notes from the June21-22 meeting, and as is usual with Bernanke now providing press conferences following those meetings, there isn’t much new to discuss.

The most interesting aspect of the notes was the dissent that the members continue to project regarding additional policy easing – ie. more bond buying.  This façade, as I’ll call it, has been implemented for some time as Bernanke has allowed/ (maybe instructed) members of the FOMC such as Richard Fischer (from the Dallas Fed Bank) and Charles Plosser (from Philly) to write Op/Eds and give speeches expressing their unwillingness to vote for more stimulus and get the fed funds rate back up to 1.00% -- while in the meantime voting right along with the other members to hold fed funds at virtual zero each meeting.

Why present a façade?  Well, the reason would be to create the impression that the central bank is still interested in price stability rather than monetizing the debt and manipulating stock and bond markets.  And before anyone accuses me of conspiracy theories, you’ll have to first explain why their actions diverge from their writings and speeches.

This front was on display again via these minutes as there was disagreement on whether additional monetary stimulus will be granted even if the economy remains weak.  Let me go out on a limb, as I like to do (although this branch is as solid as the trunk of an oak):  If the economy remains weak (GDP stuck at 2%) and the labor market mired (the official unemployment rate above 9%), there will be consensus within the FOMC to roll out the next round of QE.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900