Major U.S. stock indices ended mixed on Friday as another early rally fizzled (Dow up 99 points out of the gate) along with key sovereign bond prices within the eurozone.    For the week, the broad market gave back 2.83% for its first weekly loss in three.

Energy and basic materials finally found a little breathing room, leading the gainers for the first time in several sessions.  Utilities (only sector to close negative), health care and consumer staples were the laggards.

Italian, Spanish and French bonds yields declined (prices up) for most of the European session on Friday as it looks like what Barclays Capital called a “backdoor bazooka”  began to show itself.  That is, the ECB’s new lending facility (a facility that takes central-bank liquidity enhancement to a whole new level as it offers loans for up to three years now) has resulted in a new carry trade – borrow from the ECB at essentially nothing and buy sovereign debt that offers considerably higher yields.

Now, I can’t know if this is actually happening, but as we’ve seen in the past every improvement in these sovereigns has been driven by some sort of ECB action – which is exactly why the rallies have been short-lived.  But if it’s not this new carry-trade that people are saying is underway, then it’s simply about the ECB more directly buying this paper in the secondary market.  However, this didn’t help these sovereigns from selling off again late in the European session as Italian, Spanish and French bonds backed back up (prices lower/yields higher).

So overall it was a failed attempt, but the Draghi is becoming more Bernanke-like and attempting to manipulate the markets further – evidenced this morning by his statement that banks can use these loans to buy government bonds.  He can’t force the banks to do so, and due to the trouble they’re in I highly doubt they’ll take on more exposure, but the wink-wink statement has helped these bonds to rally again this morning.  We’ll see if the rally has more staying power than it did on Friday.

And moving on to Asia, as everyone knows by now Kim Jong Il is dead, making way for his third son Kim Jong Un to take over.  Will this new Little Kim live up to his name as become the Un Il?   I doubt it, he’s probably just as ruthless and ill-intentioned, but time will tell.  It’s just one more uncertainty we’ll all have to deal with.

Market Activity for December 16, 2011

Sector Activity for December 16, 2011

Consumer Price Index

Well, Thursday we received a producer price index (PPI) that came in pretty hot for November, and with regard to crude goods (those used at the initial stage of production) were flamin’ at +3.8% for the month and 16.9% at an annual rate over the past three months.  We didn’t touch on these numbers in Friday’s note because there was too much other stuff to talk about and I knew we’d get the consumer price report on Friday so that’s why I save it.

So, the consumer price index (CPI) came virtually unchanged (actually down 0.019%, but rounded to 0.0%) as the higher producer prices were not passed on to the consumer – at least as these inflation gauges measure things, which is a pretty big caveat.  This follows a 0.1% decline in October.  On a year-over-year basis, CPI has eased to 3.4% from the 3.9% it recently peaked at in September.

It was essentially the transportation segment that the held CPI constant for the month as the vehicles component registered a 0.3% decline and gasoline slid 2.4%, every other segment in the index rose.  Excluding energy, CPI was up 0.2% for the month, which is actually quite tame but does illustrate that the overall CPI decline was mostly energy related.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900