U.S. stocks shook off all kinds of bad news on Friday (manufacturing gauges missed estimates big time, consumer confidence cratered, still no deal on the debt ceiling, the EU banking strains, and pretty much poor earnings quality from our own banks) to hold onto gains and actually accelerate at the close for the first session in five.  The move wasn’t enough to save the week though as the broad market lost 2.06%.

While the day’s economic data was disappointing, the bright side is tech earnings as they’ve come in very nicely thus far and that’s probably what helped stocks hold gains – or maybe it’s just the weak data that had everyone thinking the eventual QE green light will be flashing.

Energy, tech and basic material shares led the broad market higher.  Health care, telecoms and financials were the day’s laggards.

This morning weakness appears to be setting back into the equity markets though as EU banking system woes are putting pressure on U.S. futures.  Asian markets ended pretty much flat last night, but European bourses are off by about 1.5% across the board.  The bond markets of the PIIGS are taking another beating (save Portugal, which is the only one that’s not making new wides) as Italy and Spain are getting hit hard, blowing out to new wides relative to benchmark German bunds.

Market Activity for July 15, 2011

Sector Activity for July 15, 2011

CPI

The headline reading on the consumer price index posted a decline for June (first in a year), but much like the PPI and import price data it was mostly due to lower gasoline prices.  The core did rise more than expected but inflation is unlikely to become a problem until the Fed rolls out more QE.  Year-over-year consumer prices were up 3.6% in June, unchanged from May.

The rest of the day’s data was much more interesting because it was flashing that QE green light.

Empire Manufacturing

New York-area manufacturing posted another negative print for July (had a minus sign in front of it for June too) as it came in at -3.76 (expected to rise to +5.00) after the -7.79 for June.

Last month the more important Chicago and ISM reading held up pretty well even as Empire and Philly fell to contraction mode; we’ll see what Philly prints on Thursday and if this latest weakness portends a problem for the big gauges this month.

New order and backlog of orders and both printed contraction as news orders remained in contraction mode for the second month and backlog of orders plunged 12 points to -12.22.

Industrial Production (IP)

Then the Commerce Department reported that industrial production missed substantially for June as the manufacturing component failed to increase.  The headline reading increased 0.2% last month, but only because of nice move from the utility (hot weather) and mining (high commodity prices) components.  Manufacturing was hit by a 2.0% decline in auto assemblies   Headline IP for the previous month was revised to negative territory, down to -0.1% from the +0.1% initially reported.

People continue to blame this in Japan, but this is June data now and that story line is getting very old.  While auto assemblies is the area most hit by the supply-chain disruptions (and is showing it over the past three months), there’s something else going on as auto inventories jumped in May (most recent data) to the highest level since July 2009.

Maybe it’s not enough fuel-efficient cars on the lot (which most people are probably wanting right now, but maybe it’s something more problematic – such as the consumer saying they can’t take on any more debt.

Further, as we’ve talked about for a while, the backlog of orders gauge within the factory reports have gone negative, this would not be the case if it were all supply chain related.

U of M Confidence

The U of M’s gauge of consumer sentiment sank to the lowest level since March 2009, and we all know the significance of that month.  Just to remind those who may have forgotten, it is the month that the stock market hit its 13-year low – a time sentiment was hugely negative.

The gauge slid 7.7 points in July to 63.8 as respondents’ assessment of both present conditions and expectations a year out deteriorated.  The expectations measure fell to the lowest level since February 2009.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900