U.S. stocks bounced yesterday to erase Monday’s losses as the rally was sparked by the latest gauge of homebuilder sentiment and later gained momentum after The Guardian reported that France and Germany have reached an agreement to expand the bailout fund to €2 trillion.

The supposed plan is to use the EFSF (bailout fund) as a guarantee against the first 20% of losses. By doing so it can lever the fund 5 to 1, taking the €440 billion in borrowed funds to issue up to €2.2 trillion worth of a sort of euro bond – a bond that would replace the troubled paper investors currently own.    Of course, this whole Brady Bond sort of idea depends on the AAA ratings of France and German.  But if this toxicity bleeds into those ratings, and we’ve already seen France’s rating at risk of a cut, then the fund is very much diminished.  But before we try to get to detailed here, the EU official who claims an agreement has been achieved remains unnamed.  And after the market closed another EU official refuted that such a plan was in advanced talks.  No matter though, because hope lives again.  I’ve got a feeling we’re setting ourselves up for another good one yet again.

The gains were led by the financials, which got smashed the day before. My, what a difference a day (and an anonymous claim) makes.  Energy and industrials also led the way.  Utilities, telecoms and health care shares were the laggards.

Stocks were up so of course the price of crude followed – up $2.27 to $88.34/bbl.   Gasoline has bounced 10% from the recent lows hit earlier in the month – the national average at the pump stands at $3.47 this morning.

More behind the click…

Market Activity for October 18, 2011

Sector Activity for October 18, 2011

PPI

The Producer Price Index (PPI) rose 0.8% for September (expected to rise just 0.2%).  This follows a three-month stretch in which the figure were essentially flat over that period as the price of gasoline fell June-August.  On a year-over-year (y/o/y) basis, overall PPI is up 6.9%.

However, the price of gasoline was back on the rise as it jumped 4.2% in September (and up 39.2% y/o/y) by the way PPI measures price activity.  The overall energy component within the PPI was up 2.3% in September and up 18.4% y/o/y.

This isn’t quite the extent of it though as the price of food continues to climb, up 0.6% for September after increases of 1.1%, 0.6% and 0.7% over the preceding three months.   PPI’s food component price is up 8.0% y/o/y and has gotten a bit hotter as it’s up 9% at an annualized rate over the past three months.

Beyond food and energy though, which is how our friends at the Fed look at inflation, the price activity among the other components remains tame.  While core PPI (ex-food and energy) did rise more than expected last month (up 0.2% instead of the 0.1% increase expected), the rate of increase is much lower – up 2.5% over the past year.  If only the consumer could get around purchasing food and gasoline, the Fed’s preferred look at inflation would actually make sense.

NAHB Housing Market Index

The National Association of Homebuilders gauge of how their members feel about the conditions within the new-home market came in at a better-than-expected reading of 18 for October.  That’s up four points from the 14 hit in September and beat the reading of 15 that was expected.

This number seemed to provide a little juice to the market – the major indices rallied from negative territory just after the number was released.  To rally on a four-point move at this level on the index means that hopium really was running wild yesterday  To see what I mean by that, check out the chart below – it takes a reading above 50 means to illustrate that majority of respondents termed housing market conditions as “good.”

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900