U.S. stocks extended the latest rally yesterday to three sessions, and up for 10 of the past 12.  And to keep a running update here, this puts the S&P 500 just 3.6% below what was a three-high touched on April 29, 2011.  At  its worst (on October 3), the correction was 19% deep.

Consumer discretionary, industrials and financials led the rally.  Utilities and basic materials ended down with health care, telecoms and consumer staples also underperforming.

Early 2012 trading is showing quite the euphoria over growth prospects and the European situation.  Unfortunately, we’ve seen this ebb and flow of risk-off to risk-on and vice versa play out several times over the past couple of years now.  But leading the pack YTD are basic materials (up 9.73% out of the gate), financials (up 8.09%) and industrials (up 7.44%).  The sector rotation from the traditional areas of safety that ruled last year has been conspicuous.  Those safety plays being utilities, consumer staples and health care – two of which are the worst-performing sectors thus far.

Let’s hope this euphoria that the economic environment has materially improved doesn’t roll over as it did in 2011 when traders fled the cyclicals they had flocked to for the relative safety of utilities and consumer staples.  As you probably know, yours truly is doubtful that economic prospects will meld into the normal upswing in this period of high debt levels and private-sector deleveraging.

And it is indeed so typical that we’re approaching the multi-year high just as earnings are beginning to roll over again.  But hey, we’ve always got more QE (and another LTRO coming in February from the ECB) to re-juice things if my sentiment is correct.

The government stuffed four major data releases in yesterday, so I’ll try to keep the commentary of each brief…you know what to do if you care to read on.

Market Activity for January 19, 2012

Sector Activity for January 19, 2012

CPI

The Labor Department reported that the consumer price index (CPI) came in flat for December (expected to print +0.1%) after also reporting no change for November.  This puts the month-over-month change on headline CPI down over the past three months as it printed -0.1% in October.   As a result, the year-over-year reading is now down to +3.0% from the 3.4% increase as of November and the recent peak of +3.9% as of September.

Excluding food and energy (you know the so-called “core rate” that the Fed loves to myopically focus upon), CPI rose 0.1% last month after the +0.2% print for November.  That year-over-year number held at +2.2%, which isn’t a problem but it is the highest level since it was sliding from +2.9% back 2006 as the recession was unfolding.

Most of the easing in CPI has occurred via the energy-related components as the measure rose 0.2% last month when excluding just energy.

Housing Starts

Builders broke ground on fewer new housing units in December after three months of increase as the component that had been driving the number (multi-family rental units) posted a 20.4% decline – that’s on a seasonally-adjusted annual basis (SAAR).

The Commerce Department reported that housing starts came in at 657,000 SAAR, which resulted in a 4.1% decline (a 0.7% decline was expected).

So that multi-family component plunged 20.4% in December, which doesn’t quite wipe out the 23.0% jump in November but it’s certainly close.  Construction on single-family units rose 4.4%, which does extend the streak of monthly increases to three.   From a year-over-year perspective, multi-family units are up 8.2%, while starts on single-family units are down 7.3%.

Jobless Claims

Ok, so last week’s initial jobless claims results were revised above the 400K mark to 402,000, just as we predicted in last Friday’s letter. Of course, with upward revisions occurring more than 90% of the time, it didn’t take a genius to figure it out.  But this latest week’s number did surprise me as it slid a very welcome 50,000 to 352,000 (expected at 384K) – that’s the lowest level since April 2008.

I’m not quite ready to say all is clear on the labor front as one can’t base an assessment coming off of the holidays – the Labor Department often has a tough time adjusting the data for seasonally swings at this point on the calendar (as a Labor Department spokesman acknowledged).  It will all clear itself up over the next few weeks as we’ll then find if the labor market has finally left that heightened 400K level behind or we’re getting excited over nothing yet again.

The four-week average fell just 3,500 to 379,000 as this measure smoothes out the more volatile weekly changes.

Continuing claims were mixed as the standard issue (providing benefits for the first 26 weeks of joblessness) slid a huge 215,000 to 3.432 million – lowest level since the week before Lehman went down.  However, half of these people rolled into emergency claims (which pick up when the standard claims period expires and extends bennies out to 99 weeks) as it jumped 105,000 to 3.560 million.

Philly Fed

And finally, we had the latest from Philadelphia Fed’s gauge of factory activity in their district, which just like Empire a couple of days back, showed that activity continues to bounce off of that third-quarter weakness.

The Philly Fed printed +7.3 for January (although shy of the +10.3 that was expected) after the +6.8 in December – that’s four months of expansion following overall contraction during the June-September run.

The internals of the report didn’t look all that compelling though as new orders fell four points to 6.9; backlog of orders slid nine points and back to contraction mode; and delivery times down five points to negative territory.  The components that helped the headline number advance were inventories, which improved by five points but remained in contraction mode, and prices paid, which isn’t exactly the component you want driving the measure higher.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900