U.S. stocks rallied again yesterday as central banks worked in conjunction to stem what’s been a growing funding problem within the European banking system – and on the third anniversary of the Lehman collapse to boot.  And here we are again, back to that 1210 level on the S&P 500, trimming the correction to roughly 11% for the third time in a month.

What occurred was a coordinated liquidity-providing operation involving the central banks of the U.S., the Eurozone, Britain, Switzerland and Japan to provide euro-area banks with U.S. dollar funding through the end of the year (euro banks need these dollars to continue making USD-based loans and to repay borrowing they made in greenbacks).  That funding mechanism has begun to lock up of late as institutional money markets have fled Europe.

Financials, energy and industrials led the rally.  Telecoms, health care and consumer staples were the laggards.

Why stocks have celebrated the talk/developments of the past four sessions is beyond me –other than it pushes another round of nasty off for a few more weeks and gives traders the green light to reach for another quick 4-5% if they’re lucky.  It began on Monday with the nonsense that China would come and save the day by buying all the junk that Italy has to sell (only to be found as nothing more than hearsay the next day).  Tuesday it was about how Russia was going to step in and assist (yes, the same Russia that repeatedly cuts off winter energy supplies to Europe).  On Wednesday stocks found hope in the fact that Merkozy convinced Greece from bailing the eurozone, for now at least.  And then yesterday’s central-bank funding announcement was the trader’s reason to reach for a little more.  None of these rumors/developments solve a darn thing, they merely kick the can down the road yet further.  But the problem is the road is neither perpetual nor smoothly paved.

I yearn for the day when interventions are no longer needed just to keep us from falling back into financial crisis – and if the developments over the past few months (via economic data, banking stress and eurozone contagion threat) haven’t made it obvious that we’re in a very fragile state right here, then this latest need for coordinated central bank intervention certainly does.

Below I touch just briefly on each economic release so not to get too long as we had a bevy of reports yesterday.

Market Activity for September 15, 2011

Sector Activity for September 15, 2011

Jobless Claims

The Labor Department reported that the employment picture failed to improve last week as initial jobless claims increased 17K to 428,000 – the previous week was revised up again, so it’s safe to assume this number will probably end up over 430K.

The four-week average rose 4,000 to 419,500.

Continuing claims were essentially unchanged as the standard issue (covering the first 26 weeks of joblessness) fell 12,000, while the emergency claims (extending out to 99 weeks) rose 11,000.  Continuing claims stand at 7.33 million.

CPI

The Consumer Price Index (CPI) came in higher than expected for August as it rose 0.4% (expected at +0.2%) after the 0.5% in July.  It wasn’t all energy either as the food component rose 0.5% for the month and is up 4.6% y/o/y.   Overall CPI accelerated to 3.8% y/o/y from the 3.6% in July.

So inflation remains a bit sticky here as this main inflation gauge continues to trend higher.  As we’ve talked about, these price gauges are lagging indicators so I still expect them to ease over the ensuing months, but it certainly has yet to occur.

Empire and Philly

In a very rare, if ever, event both the Empire and Philly factory activity gauges were released on the same day.  Considering the weakness we’ve seen within the manufacturing sector over the past few months, I was wondering early yesterday morning if this volatile market could handle two of the first looks at September factory numbers on the same day.  Now we know it did without a problem.

And both of the surveys showed that conditions within the sector continue to deteriorate.  Empire fell to a reading of -8.82 for September from the -7.72 in August – in negative territory for four months now – and the Philly Fed survey improved from one of its worst readings in its 40-year history (-30.7) but still printed an ugly -17.5 in September (negative for three of the past four months and at levels during this four –month stretch seen only during recession in the past).  Both missed what economists were expecting.

The Empire Manufacturing survey only goes back to 2001, while Philly goes back to 1967 – thus I’m just posting the Philly chart as it has a longer history with which to view.

New orders, order backlogs and the average workweek remained in contraction mode for both surveys.

Industrial Production

Despite what the regional surveys are showing, industrial production looked good for August.  The headline number rose 0.2% (expected to be flat) after the 0.9% increase in July.  The August result was actually better than the headline 0.2% as the utility component slid 3.0% -- which was probably a hurricane issue.  Manufacturing production came in at a healthy 0.5%.

What makes this diverge from the regional surveys is that they are diffusion indexes, meaning they measure how many more respondents said activity is either growing or slowing relative to the prior month.  It takes time for the results to show up via actual production.

Capacity utilization remains below normal as it came in at 77.4% -- a tick higher than the 77.3% in July but below the average of 80.3%.  For the manufacturing sector along, capacity utilization (the % of plant and equipment that is being used) stands at 75.5%, the average is 78.7%.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900