U.S. stocks bounced off of Wednesday’s slide as the ECB once again intervened in the bond market, S&P refrained from downgrading French debt (although that didn’t stop French bonds from getting slammed to the close) and Bernanke gave a speech hinting at more QE (that’s his second hint at more to come).

And as an additional parenthetical to those Bernanke comments, he said the Fed is “intently” focused on lowering unemployment and inflation will remain under control for the “foreseeable future.”  Forget the fact that real-world inflation is hardly under control, when the Fed chairman makes such comments on specific issues that involve the Fed’s duel mandate – maximizing employment and stable prices – it is the clearest signal that more unprecedented monetary action is coming.

Energy, health care and industrials led the rally.  Tech, financials and utilities were the laggards but did close higher.

Well, the Europeans called for Draghi to help and he didn’t leave them stranded as the ECB intervened in the Italian bond market. This isn’t a crutch or a traditional wheelchair; Draghi delivered the monetary version of a Hoveround®.   The buying they did was enough to push prices to a point that lowered the yield on their 10-year by 62 basis points from yesterday’s high.   That rate fell to 6.82% yesterday and is back to 6.66% (not that number again) as I type -- still too high for the Italians to manage around but down from the stick-a-fork-in-them 7.47%.  More beyond the click…

Market Activity for November 10, 2011

Sector Activity for November 10, 2011

Why the stock market rallied on this sort of news, I’m not sure.  You would think an environment with which policymakers continue to manipulate markets three full years since the financial crisis began would be seen as a negative.

Now, there is the hope out there that the transition to new governments in Greece and Italy (really it’s just new leaders) will lead to reform.  But they still have to get their people, who have been on the dole for decades, to except a completely restructured system – and that will mean lower incomes for a period of time.  They’re not going to do it voluntarily; the situation will have to get worse.  Then they will be forced to do it.

And for all of those traders looking to take advantage of short-term bounces (hoping for more kick-the-can action), I see that Germany and France continue to clash over both the near-term bailout fund (the EFSF) and the longer term plan (the ESM, which is supposed to take over in 2013 but the French seek to implement those funds in 2012).  I can’t see them coming together as the Germans know they are alone as the backstop (The Netherlands are too small to provide much help) as French yields continue to blow out to new wides – and when this occurs a credit-rating downgrade is soon to follow.  Hence the Germans and Dutch will be the only AAA countries in the zone.

With all this talk and action yesterday from the Fed and ECB, crude rallied too – it closed $2 higher to $98/bbl.  So here we have GDP growing at a pathetic 1.5% rate over the past year and crude heads for $100/bbl again – the national average at the pump is $3.44.  To be fair, the increased concerns over an Israel/Iran conflict have played a role in higher energy prices.  Still, the cost of energy (and food too, as a trip to the grocery store clearly shows) is obviously a consequence of unprecedented monetary stimulus.

Import Prices

The Labor Department reported that import prices fell 0.6% in October – the third monthly decline in six months – and the September reading was revised to 0% from the 0.3% initially estimated.

The easing of import prices over the past few months has sent the year-over-year increase down to 11.0% from the 12.9% in September and the 13.7% three-year high hit in July.

Jobless Claims

The Labor Department also reported that initial jobless claims fell 10,000 to 390,000 last week.  That is the lowest level in seven months, but as has occurred every week for as long as I can remember, the previous week’s reading has been revised up – up by 3,000 to 400,000 for the previous week.  So we can’t really have confidence that initials fell to 390K, we’ll have to see how the revision plays out next week.

In any event, we need these claims to come down the 350K level to suggest that substantial job growth has arrived in a consistent manner.

The four-week average fell 5,250 to 400,000, the lowest level since claims began to rise again in late April.

Continuing claims were mixed as the standard issue (covering the first 26 weeks of joblessness) fell 92,000, while emergency claims (take over and extend to 99 weeks) rose 43,500. So the net number declined, but the increase in emergency claims suggests that those coming off of standard claims rolled into emergency claims as they exhausted the first 26 weeks of bennies without finding a job.

These numbers too are subject revisions though and since what was believe to be a 15,000 decline in standard claims in the week before was revised to a 7,000 increase.  So we’ll if that 92K decline on standard continuing claims even holds up.

Trade Balance

For September, the trade gap narrowed to $1.8 billion, or 4%, to -$43.1 billion as the increase in export activity outpaced that of imports – exports up 1.4%, while imports were up just 0.3%.

But it is the real (inflation-adjusted) trade gap that matters for GDP.  That number also narrowed, less so, but maybe by enough to offset what looks to be weaker inventory data for September – which alone would have sent the Q3 GDP revision to below 2.0%.  The real trade gap declined by 2.0% to -$45.398 billion.  This is 4% lower than the average of the previous quarter and that’s why it may offset the lower inventory build.

I still think Q3 GDP will be revised below 2.0%, probably to 1.9% from the 2.3% initially expected.  If so, this will mark three-straight quarters below 2.0% for GDP and in the postwar era we’ve never escaped recession after such weak growth.  Then again, with the Fed more aggressive than ever, one can’t really apply a past-is-prologue analysis.

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great weekend!  Thank You, Veterans!

Brent Vondera, Senior Analyst

Phone: 636-449-4900