A largely in-line Consumer Price Index (CPI) report and higher weather-distorted jobless claims numbers contributed to a lackluster market open this morning. European markets are flat in mid-day trading despite upbeat results from a major French food producer, while Asian stocks closed higher. Japan’s Nikkei is up four days in a row to fresh 9 ½ month highs. On the commodities front, crude is flat at $85, although Brent crude is continuing its surge on Middle East unrest and tighter supplies than U.S. West Texas Intermediate. Precious metals are broadly higher, helped by a combination of a weak dollar, safe-haven buying and inflation concerns. Supply concerns are weighing on copper and pushing agricultural commodities higher. Today’s U.S. economic calendar includes: (1) Leading Indicators and (2) the Philadelphia Federal Reserve survey.
Looking back at Wednesday, stocks were up solidly on more good earnings news and on the back of a rally in Europe, marking a “double” in the S&P 500 Index from March 2009 lows. The Federal Open Market Committee (FOMC) minutes, which upgraded the Fed’s economic outlook, provided nothing to stop the market’s momentum. Tuesday’s laggards, Materials and Energy, were Wednesday’s leaders on a day in which cyclical sectors firmly outpaced defensives collectively. Wednesday was a quiet day for key commodities with the exception of crude, which rose nearly 1%.
Around our financial planning firm offices this morning, we were discussing four items that we thought would be of particular interest to our readers:
Is a potential Suez Canal shutdown today analogous to the 1970’s oil embargo? Did it cause the U.S. recession and the corresponding 21-month 50% drop in the S&P 500? The parallel between the 1970’s oil embargo and today is not a Suez Canal shutdown, since the oil can be rerouted. However, current strife in countries such as Libya, Nigeria, Iran and Iraq that materially cuts oil output would have a similar, very negative impact on global markets and economies despite the lessened oil intensity of GDP since 1973. It is worth noting that current U.S. oil inventory (West Texas Intermediate in Cushing, Texas) is the highest for this time of year it has been in five years. With oil inventories up, and continuing to build per the numbers released yesterday, the threat of a short-term shock is lessened. Further, oil prices remain below where they started the year. The 1973 embargo was a large factor in the S&P 500 decline that pushed an already weakened economy over the edge.
Today’s Spanish government bond auction was weaker than expected. Spain auctioned 3.5 billion euros of government bonds versus a target of 4 billion euros. The bid-to-cover ratio declined to 1.54 from 1.67 at the previous auction. Spain’s 10-year government bond yields are higher by 5 basis points this morning. The U.S. Treasury will auction $9 billion of 30-year TIPS later today, the first such auction in a year.
With all of the attention on it recently, what is the “reality” on inflation and its 2011 impact? Both overall and core inflation exceeded expectations in January, which only adds to the inflation fears among the public and some investors. Although the overall consumer price index (CPI) is only up 1.6% from a year ago, and consumer prices excluding food and energy are up just 1% from a year ago, rising prices for everday items such as meats (+6.2% year-over-year), cooking oils (+3.8% YOY), home heating oil (+11.8%YOY), and gasoline (+13.4% YOY) have raised fears of runaway inflation. While core inflation may be troughing out below the low end of the Fed’s 1.5 to 2.0% “comfort zone,” it appears that a “runaway” 70’s-style inflation is not likely. The “slack” in the economy, high unemployment rate, high housing and office space vacancy and inability of businesses to pass on higher input costs to the end user will all help to hold consumer prices in check in 2011.
The labor market has stabilized, but it is not accelerating. Weather continues to impact labor market data. 410,000 people filed for unemployment benefits in the week ending February 12th, 25,000 more than in the prior week. Severe weather in the first week of February in a large swath of the nation probably held claims down in the week ending February 5th, and the “payback” came in the week ending the 12th. Over the past four weeks, claims have averaged 418,000 per week, little changed from the prior week and from a month ago. The relative stability in claims suggests that aside from the weather impact (which likely held down employment in January and will boost employment in February), the labor market has “leveled out,” but it is not going up.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.