U.S. stocks tried to stage a comeback yesterday, but rolled over in the final hour of trading right around the time that the euro began its pullback from positive territory.

Fitch came out and told markets that domestic banks could be hurt if the fiscal and financial problems of Europe worsen – nothing we didn’t already know, but enough to invoke fear and volatility.  All S&P 500 sectors declined with financials suffering the steepest losses.

After the click is commentary on yesterday’s economic releases.  

Market Activity for November 16, 2011

Sector Activity for November 16, 2011

CPI

The consumer price index (CPI) fell 0.1% for October (expected to come in flat) after the 0.3% rise in September.  So just like the PPI (producer prices) we touched on in the previous letter, we’re beginning to see the weaker economic activity weigh on the inflation gauges.  The six-month annualized increase in CPI is up just 2.1%, down from the 4.0% hit in July.

On a year-over-year basis, CPI is up 3.5% (expected to come at 3.7%), which is down from the 3.9% hit in September.

So as we’ve expected for a while, the inflation gauges look like they’ve begun another period of deceleration.  Not that these gauges will show actual decline, as I’m sure the energy component will rise again – it fell 2.0% in October – since crude has returned to the $100/bbl mark.  But the runaway inflation that many have expected is just not going to occur with GDP growth at 1.5% (that’s what it’s averaged over the past year).

What’s likely is year-over-year CPI will fall back to the sub-2.0% level as recession, or close to it, is quite likely in early 2012.  (This is not a consensus view, but as we head into 2012 with no homebuyers credit boost to spring tax refunds for the first year in three, consumer already eating into cash savings again, and what will be a Europe in recession by then, I think the odds tilt to U.S. contraction.)  It is then that the Fed will become even more aggressive and cause these inflation gauges to spike again.  And as they do so, the lower-to-middle class consumer will get beat again by Bernanke’s QE stick.

Industrial Production

The Federal Reserve reported that industrial production (IP) grew at a good clip in October, up 0.7% -- although it was based off of a 0.1% decline for September, a number that was revised down from the +0.2% previously estimated.

That September decline marked the fifth month over the past year in which IP has either come in flat or declined.  That’s quite unusual for a period in which IP has yet to return to the previous cycle’s peak – still 6% below that mark four years later.

But the October reading was a good one, and even better since it received zero help from the utility sector.  Manufacturing production, which accounts for 75% of total IP, was up a healthy 0.5% for the month.  Utilities production was down 0.1% and mining up 2.3%.

Capacity utilization (the percentage of available plant and equipment that is being used) jumped five-tenths to 77.8% after falling for two-straight months.

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

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900