U.S. stocks began Wednesday’s session higher, with the broad market up 1.3% an hour into traded, but those gains vanished as we headed for the afternoon session; the major indices ended mixed with the Dow Industrials slightly higher, while the NASDAQ closed meaningfully lower. 

Telecoms, utilities and consumer staples were yesterday’s best-performing groups.   Tech was the worst-performing sector, with industrials and consumer discretionary shares not far behind. 

The market evaporation began after it was reported that Philly Fed Bank President Charles Plosser (and FOMC voting member) stated the FOMC will need to raise rates prior to 2013.  The market, at least in this era, never wants to hear the Fed will back away from pumping evermore amounts of money into the financial system.  Still, while the slide coincided with Plosser’s comments I’m not totally sure that’s what sparked the decline – it may have been more of the same like big trouble brewing in Europe and our own flirt with recession.  Everyone knows Plosser was one of the dissenters to last week’s announcement that the FOMC would hold fed funds at exceptionally low levels until mid-2013 – an announcement never explicitly stated before by the central bank – so it is no secret he doesn’t like the strategy.  Besides, Bernanke can continue to remain unprecedentedly aggressive without Plosser’s consent. 

The long end of the Treasury curve caught fire again over the past couple of days, yesterday closing within a few basis points of last week’s super-extreme lows of 2.10% on the 10-year and 3.51% for the 30.  This morning we’re rallying below those levels, down to 2.08% on the 10 and 3.48% on the 30 as the equity markets are under deep pressure this morning.  GDP forecasts are dropping like a rock, welcome to reality Wall Street, and it won’t be long before everyone is screaming for more QE. 

Market Activity for August 17, 2011

Sector Activity for August 17, 2011

Mortgage Apps

The Mortgage Bankers Association’s applications index rose for a third-straight week, but just as was the case with last week’s print the measure was solely boosted by refinancing activity as purchases fell for the eighth time in 11 weeks. 

Refinancing applications rose 8.0% after the 30.4% surge in the previous week as the 30-year fixed mortgage ratemoved lower to 4.32% from the 4.37% in the week prior.  

But the very low mortgage rate, just 11 basis points above the record low set last October, failed to deliver higher purchase apps as they fell 9.1%. 

Producer Price Index

The Labor Department reported that the producer price index (PPI) rose a more-than-expected 0.2% in July (expected to rise 0.1%) after an unrevised 0.4% decline in June, which was the first decline in a year.  The core rate, which the myopic Fed likes to watch (excludes food and energy), jumped 0.4% (expected to rise 0.2%). 

The year-over-year figures rose to 2.5% for the core and 7.2% for the overall reading. 

These inflation gauges are lagging indicators and should begin to turn down again based upon the decline in most commodity prices.  The crude goods component of PPI (those goods used at the very initial state of production) fell a large 1.2% in July and follows big declines over the previous two reporting months that has the three-month annualized rate down 21.3%. 

This is not to say that consumers won’t struggle with actual price pressures as energy and food prices remain high – something that is largely due to the Fed’s actions.  But the official readings on inflation should begin to turn down again…until the Fed rolls out more QE, at which point traders will flood into the commodity trade again. 

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Have a great day!

Brent Vondera, Senior Analyst