U.S. stocks extended the latest bounce on Wednesday as Merkozy (Merkel and Sarkozy for new readers) met with Greek Prime Minister Papandreou in a scramble to reassure everyone the country will remain part of the eurozone (actually stating that Greece is an integral part of the euro area – which is quite the hyperbolic statement unless they’re referring to the banking industry destruction that will ensue once they actually default).

One may think that this means the French and German leaders won’t throw Greece out of the zone, but what actually occurred in the meeting was Merkozy “convincing” Greece not to leave the zone so they can bring the drachma back and devalue it into oblivion to ease the debt burden.

Stocks did pare their gains at we headed for the close (cutting the rally in half in a matter of 20 minutes) as an analyst was interviewed late in the session and called the move a “suckers rally” and we’re headed for recession – not exactly sticking his neck out at this point as we’ve muddled around at sub-1.00% growth for a couple of quarters now.

Industrials, consumer discretionary and tech led the rally.  All 10 of the major industry groups closed higher.

While stocks got all happy, the bond market is hardly sanguine as it continues to signal another round of economic nastiness is coming.  The yield on the 30-year Treasury remains pegged at 3.30% as the latest auction saw strong demand for the long bond even at this paltry level of compensation.   Of course, the rally is more about the bond market predicting additional economic damage; it’s also about getting in ahead of the Fed (as we’ve talked about for some time now) since it’s expected Bernanke will be buying much more long-end debt.  That means a chance at a short term trade that’s worth more than 3.3%.

Market Activity for September 14, 2011

Sector Activity for September 14, 2011

Mortgage Apps

The Mortgage Bankers Association reported that its applications index managed to increase after three-straight weeks of decline as both purchases and refinancing activity contributed to the rise.

Apps to refinance a mortgage rose 6.0% (down 23.5% y/o/y) as the average contract rate for the 30-year fixed mortgage fell to a new record of 4.17%.  Purchases bounced by 7.0% (down 7.2% y/o/y).  As the chart below shows, purchases have a lot of room to make up though.

PPI

The producer price index (PPI) rose just 0.1% in August (expected to rise 0.2%) after the 0.4% increase for July.  The deceleration was largely due to the decline in the gasoline component as ex-energy PPI was up 0.3%.  The year-over-year number was unchanged at 6.5%.

Importantly, crude PPI goods (those used at the initial stage of production) rose just 0.2% after the 1.2% decline in July.  The three-month annualized reading for these crude goods is negative at -6.2%, which is a big reversal from the harmful increases that were occurring a few months ago.  The year-over-year rate is +18.4%.

Retail Sales

The Commerce Department reported that headline retail sales for August came in flat (expected to rise 0.2%) and the July reading was revised down to a 0.3% gain from the 0.5% previously reported.  It’s worth noting that that 0.5% print that was previously believed to have been the case led to some upward revisions to Q3 GDP back in July.  Now that that number is 0.3% and August is flat we find it’s now very likely we’ll have to depend on inventories and trade to keep us above a 1.0% economic growth number for the quarter.

Taking different looks at the data, ex auto retail sales rose 0.1% (expected to rise 0.2%) and that July number was also revised down to +0.3% from the +0.5% initially reported.  Excluding autos & gasoline, sales were also up 0.1% (expected at +0.3%) after a downwardly revised +0.2% in July.  The core retail sales data, which excludes autos, gasoline and building materials -- and flows into the GDP personal consumption component --  came in flat (0%) after the 0.3% in July.

These weak results come even as the months of July and August are helped by back-school buying, showing that the terribly weak personal spending results of the second quarter have extended into the current quarter.

Gasoline as a percentage of overall retail sales remains too high at 11.5%, and this, along with a weak labor market, is also an impediment to the consumer.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900