U.S. stocks faltered as the day progressed yesterday, which has become quite the trend over the past three sessions (as you can see via the chart below), to close down for the fourth session in five.

The trannies (Dow Transportation Average) took a 1.25% hit yesterday and have had a tough week, trailing the Industrial Average for the past five sessions – too early to tell if the overall market will follow, but something to keep an eye on.

The CRB Index fell the most in a month after Bernanke, in his second day of testimony before Congress, stated that the Fed is not prepared to take action at this point.  (This market is so strange it’s unreal.  Even those who believe the Fed will surely roll out another round of stimulus (such as myself) don’t believe it will occur next week.  It may not be until early 2012; they can’t get into it again with QE2 just expiring on June 30.  So the comments from Bernanke didn’t seem all that market moving to me, but this is an incredibly mercurial U.S. market as it reacts to even the slightest comments on QE.)  Anyway, the prices of cotton, crude, cattle and wheat led the CRB Index lower.

The Italians made quick work of pushing forward that austerity vote (until things started to blow up over there a couple days back it wasn’t scheduled to be voted on until August or September) as they passed it yesterday.  So, while the problem of persistent sub-1.0% growth in Italy remains a major problem, at least the spending side of the ledger is moving along.  So now the market will solely focus on that U.S. debt ceiling thang.

Market Activity for July 14, 2011

Sector Activity for July 14, 2011

Producer Price Index

The producer price index (PPI) fell more than expected in June as the figure came in at -0.4% (-0.2% was expected).  This marks the first monthly decline in a year.  However, it was all due to a slide in gasoline prices (I know, they remain high but they are down from worse levels and that’s all this data measures) as the ex-energy figure rose 0.4% -- the highest reading is several months.

On a year-over-year basis PPI rose less than expected as it came in at 7.0% (expected to come at 7.4%).  This is down from 7.3% in May.

PPI, along with the other inflation gauges, should continue to decelerate.  However, it will be a short-lived deceleration; the timeframe depends upon when the Fed rolls out the next round of QE.

Retail Sales

Retail sales for June came in a bit better than expected at the headline level (which includes all components) but disappointed when excluding autos and gas.

Headline retail sales rose 0.1% (expected to fall 0.1%) after the 0.1% decline in May.  Exclude autos and the number came in flat (unchanged from May), which was expected – but the prior month was revised down to +0.2% from the initially reported +0.3%.  Excluding both autos and gas station receipts, sales rose just 0.2% (half the rate expected) after the same increase for May, which was also revised down from 0.3%.

And then match these figures against the monthly CPI readings and we find that retail sales are just about flat for the second quarter – that’s on a real (inflation-adjusted) basis.  This is what matters for GDP and the Q2 number that arrives on July 29 is likely to show the weakest personal consumption number for this expansion – and that’s saying something as this component of GDP has been weak throughout this expansion.

Finally, despite the 1.3% drop in gasoline receipts they continued to take a big chunk of the pocketbook in June (see chart).

Jobless Claims

Initial jobless claims remained above the 400K mark for the 14^th straight week but did produce the nicest decline in about two months.  Initials fell 22,000 to 405,000 for the week ended July 9.  As a result, the four-week average fell just about 4,000 to 423,250.

Continuing claims were flat though as the traditional claims (those that cover the first 26 weeks of joblessness) rose 15K to 3.73 million, while emergency claims (those that take over when the 26-week period elapses and extend bennies to 99 weeks) fell 15K to 3.83 million.

Business Inventories

The Commerce Department reported that business inventories rose a larger-than-expected 1.0% for May (expected to rise 0.9%), while the sales data fell 0.1% and is flat for two months as the April figure rose just 0.1%.

Inventories are on pace to rise substantially for the second quarter, but this is about the only thing last quarter’s GDP has going for it.  The measure will get a little help from the trade data, but, as we just talked about above, the consumer (largest component of GDP) is not going to provide much at all and business spending won’t be enough to offset that.

Thus, what we’ll likely see is another sub-2.0% growth number and real final sale of GDP (the main measure of demand) will come in at another very weak sub-1.0%.  This is a reading that should be printing 3.0%-4.0% results.  And unless final demand picks up in strong fashion, inventories may very well weigh on GDP in the back-half of the year.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900