The market completely shook off a lackluster industrial production report and comments from Fed Chairman Bernanke the day before on the state of the economy, statements that had pre-market trading tracking lower. A rally in commodity-related basic material shares (up about 1%) led the broad market into positive territory.
Consumer discretionary shares were the biggest loser on the session (down 0.74%). Of the 10 major industry groups, six rose and four fell.
Volume was very weak as less than one billion shares traded on the NYSE Composite.
Market Activity for November 17, 2009
Producer Price Index (PPI)The Labor Department reported that producer prices rose 0.3% in October (+0.5% was expected), after a 0.6% decline in September. Year-over-year the reading is down 1.9%. Excluding food and energy, what’s known as the core rate, PPI fell 0.6% for the month and is up just 0.7% year-over-year. So on the more headline numbers the data remains uneventful.
A look within the report gets a little more interesting. Over the past three months, PPI is up 7.4% at an annual rate. That’s up from +0.6% by the same meaure in September.
Total intermediate goods (those used in the middle stage of production) were up 0.3% in October and are higher by 9.7% annualized over the past three months (although mostly due to a large increase in August, which had clunker-cash auto assemblies written all over it). Core intermediate goods fell 0.5% in October, but are up 5.5% over the past three months at an annual rate. Crude materials (those used at the initial stage of production) were up 5.4% in October; the core rate was up just 0.5% after huge back to back gains in September and August of 3.6% and 6.0%, respectively. On a three month basis, total crude goods are up 31.5% and the core rate for crude goods is up 48.6% at an annual rate – albeit from pretty low levels.
So, there is evidence of underlying inflationary pressure. We’ll see how this materializes into higher headline PPI readings and later consumer price inflation. For sure much of these underlying pressures will be absorbed as the slashing of payrolls has worker productivity at elevated levels; nevertheless, we’ll certainly see PPI begin to post positive year-over-year numbers when the November reading is released. By December, it is likely y/o/y PPI will begin to run at 3.5%-4.0%. Not terribly concerning, but it is a significant turn from the trend of negative readings of the past year.
We’ll continue to watch credit. When it begins to expand again, that is when the unprecedented level of dollars the Fed has pumped into the system will result in much higher inflation readings.
Industrial Production and Capacity Utilization
The Federal Reserve released their monthly industrial production figure, which showed if not for the third-coldest October on record production would have ended a three-month streak – a bounce off of the most prolonged contraction in the post-WWII era.
Industrial production (IP) rose 0.1% last month (+0.4% was expected) after rising at a downwardly revised 0.6% in September – previously estimated to have risen 0.7%. There are three main components to this data: manufacturing, utility and mining production.
Manufacturing fell 0.1%, held back by a 1.7% decline in auto production after huge increases over the previous three months. There we had clunker-cash driven auto sales (and thus assemblies) driving the previous IP gains and now that that has run its course, we’re seeing the short-term effects of that program in this weak reading. Machinery orders did rise, up 0.2% for the month. Computer and electronics production fell 0.3%. Overall business-equipment production fell for an eighth month in 10 and is down 6.7% year-over-year – down 10.79% at an annual rate since peaking in March 2008. Production of construction supplied fell hard for a second-straight month, down 1.2% in October and down 17.0% over the past year.
Mining production fell 0.2%, a bit of a surprise at these commodity prices.
Utility production saved the month as the segment posted a 1.6% gain.
Capacity utilization (CU) inched up for the fourth-straight month, touching 70.7% -- the cycle low, also the all-time low (data goes back to 1967), of 68.3% was hit in June. The long-term average on this reading is 81.0%, so we’ve got a ways to go before a meaningful degree of hiring begins. Firms will increase current employees’ hours worked before adding to payrolls, as we’ve been talking about for some time now.
Manufacturing industry CU ran at 67.6% in October – the long-term average is 79.7%. Utility CU ran at 79.0% -- the long-term average is 87.6%. Mining CU ran at 83.5% -- the long-term average is 87.5%. It won’t take long for mining utilization to blow through the average if the dollar stays down and commodity prices high.
National Association of Home Builders (NAHB) Index
The NAHB showed confidence among homebuilders remained at depressed levels in November, unchanged from October at 17 – a reading below 50 illustrates most home builders view conditions as poor. High joblessness, lofty foreclosure rates (filings surpassed 300,000 for the eighth-straight month in October, according to RealtyTrac) and problems obtaining credit are all holding down sentiment.
The NAHB also gauges buyer traffic and sales expectations for the next six months. The buyer traffic gauge was unchanged at 13 – the recent high is 17 and the all-time high is 60. The gauge of future sales rose two points to 28 – the recent high is 30 and the all-time high is 83.For Some Reason I’m not Feeling Stimulated
Bloomberg News reported yesterday afternoon that the House is working on a “job creation” plan this year that will include money for highway construction (sorry, that creates work not jobs), tax credits for small businesses to hire more workers (one assumes this is the vaunted concept that first made the rounds this past summer – a $4,000 tax credit to be paid over two years; if members of Congress took the time to inform themselves of what it costs to hire a worker they’d understand how silly this $ amount is), and finally, drum roll please…another extension of jobless benefits (that would bring us to triple digits as current extensions run out at 99 weeks).
Bienvenue a l’aupair etat.
Have a great day!
Brent Vondera, Senior Analyst
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