U.S. stocks bounced after opening lower yesterday as FOMC member Charles Evans stated he expects the zero interest-rate policy to remain in place beyond mid-2013 (that mid-2013 is the timeline Bernanke set back in August as the market was tanking).

Also helping to whisk away concerns (for the moment I guess) was word that Mario Monti (the guy that was supposed to the new PM but will now accept the position of Finance Minister) will be able to form a new government to battle the debt crisis – there was speculation prior to the open that he was having difficulty bringing members of Parliament along with his plan.

I’d like to say that a good retail sales report helped the market advance, but that data was out pre-market and the major indices still opened lower.  It’s still all about Europe.

The bond market didn’t share the stock market’s apparent optimism as U.S. Treasurys closed flat – the two year at a 0.24% yield and the 10-year at 2.06%.  Bond traders remain quite concerned over the fact that key euro-zone interest-rate spreads blew out again as just about the entire Italian yield curved backed up to 7% and French and Spanish spreads hit new wides against the German benchmark.  This morning those spread are wider yet, with what is supposed to be a AAA France watching their yields hit nearly 200 over German bunds as Unicredit (Italy’s largest bank) goes running for Unihelp by asking the ECB for more funding.

Blow Out:

This doesn’t only mean trouble for those governments, but much more for the EU banking system that holds most of this stuff.  So long as the ECB remains unwilling to engage in a Bernanke-style level of manipulation (become aggressive enough in their bond-buying campaign to overwhelm the selling), pessimism is likely to drive Treasurys to lower yields/higher prices.

But let’s take a break from any more specific comments on what’s occurring across the pond; we’ve got lots of U.S. data to touch on.  Details below the click…

Market Activity for November 15, 2011

Sector Activity for November 15, 2011

PPI

The producer price index (PPI) fell 0.3% in October (less than the -0.1% expected) after the 0.8% jump in September.  This is the just the second monthly decline over the past 16 months but should be the start of something.  I’m not sure the inflation gauges will begin a string of negative readings, but they should show a significant easing of price increases (exclude food and energy in this analysis as those prices look pretty sticky here) as these measures have quite the lag to them.  What I mean by that is it takes a while for the slower growth of the past three quarters to make it way into these inflation gauges.  That’s not to say that real-world inflation won’t remain as problem as the Fed’s manipulative ways doesn’t only help to levitate stock prices, but also gooses the price of crude.

The year-over-year reading fell a full point to 5.9% from the 6.9% in September (+6.3% was expected).

Retail Sales

The Commerce Department reported that retail sales rose 0.5% in October (beating the 0.3% expected) as most of the components posted gains.  The report overall was actually quite strong.

With the exception of gasoline stations, clothing and furniture sales, the underlying data posted good results.  Electronics sales jumped 3.7% (this follows two months of flat activity but this is still a big number), building materials rose 1.5% (Hurricane Irene and the following snowstorm probably had something to do with this component), food and beverage rose 1.1%, sporting goods up 1.3% and internet sales up 1.5%.

I do believe that the drop in gasoline station receipts is a bad sign, but for the most part the rest of the report made up for that.

I’ve got to sound the caution though, sorry.  Unless the personal income report for October shows a nice rebound, the cash savings rate is going to take another hit (it’s declined to 3.6% from 5.3% in July) as consumer spending has significantly outpaced income growth for four months.   Retail sales is up 8% at an annual rate over the past four months (a nice rebound after slumping to 2.4% as of July), yet incomes have barely budged – and are negative when adjusted for inflation.  If incomes fail to improve then spending obviously cannot continue to post meaningful gains and that will show up via yet weaker GDP readings in the first half of 2012.

Empire Manufacturing

New York-area manufacturing activity posted the first positive reading in six months for November, but just barely.  The Empire Manufacturing reading (the NY Fed Bank’s measure of factory activity) came in at +0.61 after the -8.48 in October.

The internals were pretty nasty though.  The measure only managed a slight positive reading as the shipments index jumped four points to +9.43.  However, one can’t assume that shipments will continue to help out as new orders slipped back to negative territory, inventories fell deeper into contraction mode, the same for order backlog, and the number of employees fell to negative territory.

Based on these internals – and the very weak level of expansion in terms of the headline reading -- one should expect that Empire will return to contraction mode in November.

Business Inventories

Business inventories were unchanged in September and the August reading was revised lower to print 0.3% instead of the 0.4% previously expected.  This marks the first month there’s been no build in stockpiles since December 2009.

The sales data remained good, rising 0.6% for the month, but the refusal to expand inventories shows that businesses may have shifted to a new level of caution.  The significance of this inventory data is that this component of GDP will have weighed more heavily on Q3 GDP than previously estimated –  the change from the previous quarter was meaningful.    Those better-than-expected trade figures we talked about last week should offset this weaker inventory data, but it’s not obvious it will be enough to keep GDP from being revised to below 2.0%.

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I’ll be out for the rest of the week, Dave or Pete will take over until Monday.  Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900