The broad market was pushed lower by basic material and energy producing stocks as Fed comments sent the dollar higher and commodity prices lower.
Health-care, information technology and industrial shares also slipped. Utility, financial, consumer discretionary and consumer staple shares closed higher for the session.
More than four stocks fell for every three that rose on the NYSE. Some 1.35 billion shares traded on the Big Board, about 10% lower than the three-month daily average.
Oil prices fell for the second-straight day, slipping 2.26%, following a 3.02% drop on Monday. Still, this pullback has come about $4 short of erasing Friday’s $10.75 per barrel jump. Crude is higher this morning on speculation that supplies will decline for the fifth week in a row as Wednesdays bring the weekly energy report.
I think it was last week that some port issues caused havoc with imports, so there is a decent possibility this will reverse the trend and we may actually see a build in crude and gasoline supplies. We’ll find out at about 9:30 this morning.
In any event, the Fed has recently done some good work in keeping some pressure on crude prices by boosting the dollar, but these words must turn into action and as the FOMC moves fed funds back to 3.00% by early next year (my opinion), the course of these two items should go in our favor.
It’s been interesting to watch the Fed reverse their language on rates and inflation. Until recently, Bernanke and Co. were sticking, precariously I’ll add, to their flawed Keynesian models that led them to believe commodity prices would fall simply because growth had slowed. For months they based their assumptions on this idea and delivered many speeches on how sub-par growth would bring energy prices down. In fact, their aggressive rate cutting, and the damage it has done to the dollar, helped energy prices to explode upward; thankfully they seem to be acknowledging this.I’m beginning to think the Fed is preparing us for a higher-than-expected CPI report on Friday and the monetary tightening that may result. If the headline figure moves above 4% and the core rate pushes to the 2.5% level this may spark a mild rate-hiking campaign.
These are not horrible rates of inflation, especially since CPI overstates price activity a bit during most periods – averaging the three major gauges and overall inflation is running at roughly 3.5% year-over-year. However, remember that the April CPI figure didn’t seem to match reality as the energy component was basically flat due to seasonal adjusting. That energy component will drive the index higher on Friday and the Fed may be realizing this – hence their newfound hawkishness. If a move above 4% on CPI gets the job done its fine by me; as we’ve explained for a while now, some mild tightening will actually boost activity via lower oil prices that should result.
On the economic front, the trade balance for April widened a bit due to higher crude prices – the higher price per barrel caused import growth in nominal dollar terms to exceed the growth in exports.
However, when we adjust for the move in price the trade figures actually narrowed in real terms – the deficit in trade fell to the lowest level since August 2003. As long-time readers know, I’m not one to get all worked up over a trade deficit, so the fact that it is narrowing doesn’t make much difference to me. Whether we import more bananas or capital, one or the other doesn’t spell impending economic demise.
Personally, I’d rather have the capital and that is what results as more dollars are put into the hands of foreigners via robust trade. What’s important is growth expectations. Embrace the right polices and those dollars moved over seas via high U.S. import activity (and remember there is a huge benefit to living standards by this trade via lower prices) will come back home in the form of investment. Beware of poor tax policy decisions though (especially on investment), and that is one of the uncertainties currently as the November elections are upon us.
Anyway, the point that needs to be made about the real-term trade gap narrowing is that it will help boost GDP. The March figures narrowed more than expected, so when the first-quarter GDP is revised it will be higher and this April figure isn’t going to hurt the second-quarter reading either.
Exports are exploding – up 19% year-over-year and this is good for our industrial sector – more specifically it is helping our manufacturing sector remain very near expansionary levels even as housing and auto industry woes drag on factory activity.
But imports have bounced back strong too after a couple months of weakness. This is a very important signal as it suggests economic activity is stronger than many currently proclaim. And not all of this import growth is a result of crude imports – imports ex-petro were up 2.6% in April. I didn’t see anyone mention it, but capital goods imports were up 3.5% in April and 8.5% year-over-year. These are good numbers that suggest businesses are spending. Factoring in the period of overall weakness we’re working through and this capital goods activity is quite strong.
I notice this morning that it appears certain political organizations are disseminating comments on the labor market, stating that the unemployment rate has hit the highest level in 22 years. Here we go again. This reminds me of the 1992 campaign when some were saying the economy was in the worst state in 50 years – suggesting it was the worst economic period since the Great Depression. That claim was hugely false as the economy rose at a robust real rate of 4.1% during 1992.
This claim on the jobless rates is equally false. What occurred was the unemployment rate’s rise in May was the largest jump in 22 years, but the jobless rate itself is not at its highest level in 22 years. In fact, the current rate of 5.5% is below the 20-year average and was higher just three years ago.
Have a great day!
Brent Vondera, Senior Analyst
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