U.S. stocks took yesterday’s weak jobless claims and retail sales reports pretty well as the major indices rallied off of morning-session weakness.  The data did appear to weigh on European bourses, however, as they lost steam going into their close – those indices began their session up 1-3% across the board but most ended flat to slightly down. 

Basic materials, industrials and tech led the market higher.  Energy, utilities and consumer staples were the laggards.  You know, I brought this up a couple of days ago, but with the exception of energy’s current weakness, early 2012 is setting up much as early 2011 did – high cyclicals leading the way with the areas of safety as the laggards. 

Energy shares are down four of the past six sessions, having trouble each time crude falls below the $103/bbl level.   And crude was down further yesterday, closing at $98/bbl (wish that was truly a low level).  The EU reportedly is going to delay their proposed embargo on Iranian oil imports by six months.  That means more supply and speculators retreated. 

Back to that European scene, as we noted yesterday morning, ECB President Draghi decided not to ease further by keeping their benchmark rate at 1.00%.  Now, the ECB engaged in massive QE-like easing a month back when they extended loans to the banking system to up to three years.  But just from the rate mechanism, it seems as if Draghi will try to refrain from the Full Bernanke and keep his emergency rate at 1.00%.  

In his press conference, Draghi basically bragged that his actions have helped key sovereign yields from blowing out further – I guess he had to offset his deeply negative comments on the state of the eurozone economy.  In fact, those yields in Spain and Italy did come down nicely yesterday morning after good auctions.  So long as the ECB just keeps buying, sure, they will prevent a blow out scenario.  But such actions are not a long-term solution. 

Market Activity for January 12, 2012

Sector Activity for January 12, 2012

Retail Sales

The Commerce Department reported disappointing retail sales results for December as the headline number rose just 0.1% (expected at +0.3%), off of an upwardly revised 0.4% increase in November (previously stated at +0.2%).  The ex-autos number posted a 0.2% decline (expected at +0.3%) after the 0.3% increase in November – that’s the first decline since May 2010.

In terms of the individual components, motors vehicles, furniture and clothing were the bright spots.  But electronics sales more than wiped out the prior two months worth of gains with a 3.9% slide; gasoline station receipts fell 1.6%; general merchandise fell 0.8% (hasn’t increased for three months); department stores fell 0.2% (also down for three months); and internet retail fell 0.4%, but after big gains in the prior two months. 

And for what’s called the “control group” (or retail sales excluding autos, building materials and gasoline – it’s meant to most closely resemble the personal consumption number within GDP), it barely improved from the result in the prior three-month period, thanks to a 0.2% in December.  Expectations were for significantly higher spending in Q4, thus those GDP estimates are getting revised lower.

Jobless Claims

Adding insult to injury, initial jobless claims jumped 24,000 to 399,000 last week, essentially ending the five-week stretch in which these claims have printed sub-400K readings.  Yes, this one was just below that 400K mark, but wait until the revisions comes out next week – you can bet it will print above 400K as revisions have been higher more than 90% of the time. 

The four-week average rose 7,750 to 381,750.

Continuing claims fell on net as the standard issue (covering the first 26 weeks of joblessness) jumped 19,000 to 3.328 million, while the emergency claims (taking over to extend out to 99 weeks) fell 48,300 to 3.454 million. 

So the combination of these two reports retail sales and jobless claims) shows that the holiday season may have provided quite the fake out to those thinking economic activity improved measurably.  And on this jobless claims number specifically, the fact that initial claims rose 24K along with standard continuing claims rising 19K shows that holiday retail layoffs have begun. 

Business Inventories

Commerce also released it business inventories report for November, which showed a 0.3% increased (a bit shy of expectations) after the 0.8% build in October.  This puts the quarter on pace to add to GDP, but it will be less than what economists had expected. 

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Have a great weekend and MLK Day!

Brent Vondera, Senior Analyst