U.S. stocks gained ground Thursday despite a rough day on the economic front – and guess which sectors led the way? Yep, financials and consumer discretionary shares as has become the trend on days of strength. As we touched on yesterday, one can look at these two areas and based on their direction you pretty much know whether or not the benchmark indices advanced.
Ugly economic releases from the Labor Department sent the broad market lower at the open, but stocks quickly reversed course gaining nearly 2% from the session’s low – holding onto most of that rally to the close.
Market Activity for August 14, 2008
As financials (up 2.55%) and consumer discretionary (up 1.97%) led the way, most industries participated in the rally as seven of the 10 major S&P 500 groups rose. Information technology and industrial shares gained 0.70% and 0.56%, respectively. Consumer staples, health-care and telecom stocks advanced a bit as well.
The dollar continues to catch fire as evidenced by the Dollar Index, which has moved to the 77 handle. The greenback has jumped 7.30% in the past month – a huge move.
However, the 80 level in probably necessary to escape what many perceive as troublesome levels. I believe we need to see some mild Fed tightening in order to get there, but most seem to disagree with this view due to the credit/financial-sector woes. We shall see where the inflation gauges take us – more on this below.
In any event, it is good to see the greenback rally and it’s helping to push commodity prices lower from the highly pernicious move that took place in the three months ending June.
On the economic front, the Labor Department reported that initial jobless claims dropped 10,000 to 450,000 in the week ended August 9. While a decline is nice, the figure currently hangs at a worrisome range. The chart below shows the four-week average has jumped well above the 400k level – this does not bode well for the August jobs report. As we had discussed for several months, jobless benefit claims held below this 400k level, which gave us confidence the monthly job losses would remain mild. Now that this figure has spiked, it becomes much more difficult top remain sanguine that those losses will remain below 80,000 per month.
That said, due to the government’s Emergency Unemployment Compensation Program it will take a couple of weeks to get a truer reading on claims as a way to gauge the overall job market. (The BLS (Bureau of Labor Statistics) believes the impact of this program has peaked.)
Thirty-five states and territories reported an increase in claims, while 18 reported a decrease.
Continuing claims – those collecting benefits for more than a week – have risen to the highest level since October 2003. The recent government program to extend the length of time one can collect is helping to push this figure higher as those that would otherwise have seen benefits expire, can continue to take the handout.
In a separate report, the Labor Department reported the consumer price index rose 0.8% in July and accelerated on a year-over-year basis to 5.6% -- that’s the highest in nearly 18 years. On a three-month annualized basis the CPI has jumped 10.6%; that’s an acceleration from 7.9% during the previous three-month set.
I’ll note CPI is known to overstate inflation, yet the chained CPI figure – which tracks consumer preferences and the substitution effect more quickly – rose to 4.8% year-over-year after a readings of 4.2% in June and 3.6% in May. This means the Fed’s preferred inflation gauge, the PCE index – will hit roughly that level, which is considerably higher than Bernanke’s stated “comfort zone.”
Over the past few weeks we’ve mentioned the risk of inflation becoming embedded – that is, firms have gotten hammered with higher commodity costs for such a long time they have now begun to aggressively raise prices to compensate for those higher costs. The ISM and PMI (as most readers know these are factory activity indexes) business surveys have been showing this occurring of late; now we have the most-watched small business survey (from the National Federation of Independent Business – NFIB) report a record-high percentage of firms both raising prices and planning to do so in their latest August report.
People look at the lower energy prices of late and expect this to push future inflation gauges lower. I’m just not sure this will occur to the extent they are expecting due to the trends just mentioned. In addition, food prices are also boosting the inflation figures, so energy isn’t the sole reason. On the bright side, the medical care reading within CPI has been nicely contained over the past several weeks and decelerating -- up just 0.1% in July.
There is one group that can essentially make sure the inflation trend does moderate and that is the Fed. Just some mild tightening could go a long way. Yes, this will hurt mortgage resets, but many of these people are in a world of hurt anyway – fed funds could be cut to 1.00% and those that couldn’t afford the initial interest rate on their adjustable mortgage will still find they’re in a bad spot. Besides, those that put little-to-no money down now find their loans are higher than the house is worth. And further, yes, banks need to raise capital and the Fed’s easy policy has this in mind also. But it is a very dangerous game to abandon price stability. Besides, let’s not put undue harm on the entire economy just to help out those that have made poor decisions.
In other news, I see the Europeans have been mugged by reality as the Russians continue to push into the interior of Georgia, well past Ossetia. The Germans had been blocking Eastern European membership to NATO. Now that it has become obvious Russia’s aim is to control the Baku-Tbilisi-Ceyhan pipeline – the only oil flow in the region that Russian does not have control over – and thus block energy to Western Europe, while attempting to dictate Eastern Europe’s future, the Euros seem to be coming around. This is an important and very positive development even if Russia’s actions are troubling.
Have a great weekend!
Brent Vondera, Senior Analyst
Ugly economic releases from the Labor Department sent the broad market lower at the open, but stocks quickly reversed course gaining nearly 2% from the session’s low – holding onto most of that rally to the close.
Market Activity for August 14, 2008
As financials (up 2.55%) and consumer discretionary (up 1.97%) led the way, most industries participated in the rally as seven of the 10 major S&P 500 groups rose. Information technology and industrial shares gained 0.70% and 0.56%, respectively. Consumer staples, health-care and telecom stocks advanced a bit as well.The dollar continues to catch fire as evidenced by the Dollar Index, which has moved to the 77 handle. The greenback has jumped 7.30% in the past month – a huge move.
However, the 80 level in probably necessary to escape what many perceive as troublesome levels. I believe we need to see some mild Fed tightening in order to get there, but most seem to disagree with this view due to the credit/financial-sector woes. We shall see where the inflation gauges take us – more on this below.
In any event, it is good to see the greenback rally and it’s helping to push commodity prices lower from the highly pernicious move that took place in the three months ending June.
On the economic front, the Labor Department reported that initial jobless claims dropped 10,000 to 450,000 in the week ended August 9. While a decline is nice, the figure currently hangs at a worrisome range. The chart below shows the four-week average has jumped well above the 400k level – this does not bode well for the August jobs report. As we had discussed for several months, jobless benefit claims held below this 400k level, which gave us confidence the monthly job losses would remain mild. Now that this figure has spiked, it becomes much more difficult top remain sanguine that those losses will remain below 80,000 per month.
That said, due to the government’s Emergency Unemployment Compensation Program it will take a couple of weeks to get a truer reading on claims as a way to gauge the overall job market. (The BLS (Bureau of Labor Statistics) believes the impact of this program has peaked.)
Thirty-five states and territories reported an increase in claims, while 18 reported a decrease.
Continuing claims – those collecting benefits for more than a week – have risen to the highest level since October 2003. The recent government program to extend the length of time one can collect is helping to push this figure higher as those that would otherwise have seen benefits expire, can continue to take the handout.
In a separate report, the Labor Department reported the consumer price index rose 0.8% in July and accelerated on a year-over-year basis to 5.6% -- that’s the highest in nearly 18 years. On a three-month annualized basis the CPI has jumped 10.6%; that’s an acceleration from 7.9% during the previous three-month set.
I’ll note CPI is known to overstate inflation, yet the chained CPI figure – which tracks consumer preferences and the substitution effect more quickly – rose to 4.8% year-over-year after a readings of 4.2% in June and 3.6% in May. This means the Fed’s preferred inflation gauge, the PCE index – will hit roughly that level, which is considerably higher than Bernanke’s stated “comfort zone.”
Over the past few weeks we’ve mentioned the risk of inflation becoming embedded – that is, firms have gotten hammered with higher commodity costs for such a long time they have now begun to aggressively raise prices to compensate for those higher costs. The ISM and PMI (as most readers know these are factory activity indexes) business surveys have been showing this occurring of late; now we have the most-watched small business survey (from the National Federation of Independent Business – NFIB) report a record-high percentage of firms both raising prices and planning to do so in their latest August report.
People look at the lower energy prices of late and expect this to push future inflation gauges lower. I’m just not sure this will occur to the extent they are expecting due to the trends just mentioned. In addition, food prices are also boosting the inflation figures, so energy isn’t the sole reason. On the bright side, the medical care reading within CPI has been nicely contained over the past several weeks and decelerating -- up just 0.1% in July.
There is one group that can essentially make sure the inflation trend does moderate and that is the Fed. Just some mild tightening could go a long way. Yes, this will hurt mortgage resets, but many of these people are in a world of hurt anyway – fed funds could be cut to 1.00% and those that couldn’t afford the initial interest rate on their adjustable mortgage will still find they’re in a bad spot. Besides, those that put little-to-no money down now find their loans are higher than the house is worth. And further, yes, banks need to raise capital and the Fed’s easy policy has this in mind also. But it is a very dangerous game to abandon price stability. Besides, let’s not put undue harm on the entire economy just to help out those that have made poor decisions.
In other news, I see the Europeans have been mugged by reality as the Russians continue to push into the interior of Georgia, well past Ossetia. The Germans had been blocking Eastern European membership to NATO. Now that it has become obvious Russia’s aim is to control the Baku-Tbilisi-Ceyhan pipeline – the only oil flow in the region that Russian does not have control over – and thus block energy to Western Europe, while attempting to dictate Eastern Europe’s future, the Euros seem to be coming around. This is an important and very positive development even if Russia’s actions are troubling.
Have a great weekend!
Brent Vondera, Senior Analyst
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