Friday, April 15, 2011

Morning Update/ Market Thread 4/15 – Not Tax Day Edition…

Good Morning,

Just as a reminder, tax day this year does not fall on the 15th, it is this Monday, the 18th. Another note, today is also options expiration.

Equity futures are higher this morning after another magical bounce yesterday afternoon. Bonds are higher, however, while the dollar continues to sink and sink. Oil is flat, but gold and silver are both going on to new highs after huge jumps yesterday. What do you think that says about all the deficit reduction talk?

The CPI came in the same for the month of March as February, rising .5% (6% annualized, but trumped to the max, of course). Here’s Econospin riding the “core” is okay train:
Highlights
Today's CPI report is a tale of two cities-headline is hot while the core is subdued. The consumer price index in March posted a 0.5 percent hike, matching the increase in February and meeting expectations. Excluding food and energy, the CPI eased to 0.1 percent, following a 0.2 percent rise and coming in below analysts' forecast for 0.2 percent.

By major components, energy jumped 3.5 percent after surging 3.4 percent in February. Gasoline increased 5.6 percent, following a 4.7 percent hike in February. Food price inflation worsened to a 0.8 percent gain, following a 0.6 percent boost in February.

The core was softened by a 0.5 percent decline in apparel prices, a 0.1 percent dip in household furnishings, a flat recreation component, and shelter rising only 0.1 percent. On the upside, notable gains were seen in new & used vehicles, up 0.8 percent, and public transportation, up 1.3 percent largely on airline fares.

Year-on-year, overall CPI inflation worsened to 2.7 (seasonally adjusted) from 2.2 percent in February. The core rate rose to 1.2 percent from 1.1 percent on a year-ago basis. On an unadjusted year-ago basis, the headline number was up 2.7 percent in March while the core was up 1.2 percent.

Today's report provides a policy quandary for the Fed or at least a public relations bump in the road if some FOMC participants want to keep arguing that all that matters is the core. If that is the case, perhaps consumers should go out and rebuild their wardrobe instead of eating and driving. The bottom line is that this report raises the debate about what counts in making monetary policy.
It is interesting that core is lagging so much. To me this is just another indication of debt saturation, where the consumer is maxed – thus prices of commodities rocket on hot money, but none of that money makes it into consumer hands so manufacturers are not able to pass that cost through easily. As soon as costs rise, like for oil, then demand destruction occurs, and down goes the American standard of living. Works great for the central bank, sucks huge rocks if you are living on a fixed income or a declining one. I guarantee you that if the “Fed” continues to pump that the turmoil throughout the world will gain pace.

The Empire Manufacturing Index rose from 17.5 to 21.7. This is a survey of manufacturers in the New York region conducted by the “Fed.” Since they are in control of this non tangible report, I question the results, but will pass along the spin:
Highlights
Manufacturing activity in the Empire State region is robust and shows no substantial effect from Japan. New orders surged in the April report as did shipments and, yes, even employment. A look at the supply chain shows no lengthening in delivery times. In a special question, 80 percent of the sample report little or no impact from the crisis in Japan.

The news isn't all good given further acceleration in prices including strong acceleration in prices received in what is an indication of cost pass through. But this report is very positive. Next data on the manufacturing sector will be included in this morning's industrial production report for March at 9:15 a.m. ET.
Industrial Production figures also rose giving some credence to the Empire State Report:
Highlights
The manufacturing sector continues to fuel the recovery. Overall industrial production in March jumped 0.8 percent, following a revised 0.1 percent uptick the month before (originally unchanged). Analysts had forecast a 0.6 percent increase. Importantly, manufacturing continued a string of healthy gains, advancing 0.7 percent, following a 0.6 percent boost in February. A jump in auto production helped but other manufacturing components also were positive. For other sectors, utilities rebounded 1.7 percent after dropping 3.6 percent in February. Mining gained 0.6 percent in March after a 0.3 percent rise the month before.

Within manufacturing, durables advanced 1.0 percent in March, and gains were widespread across its major categories. The output of motor vehicles and parts rose 3.0 percent, following an increase of 4.6 percent in February. Excluding autos, manufacturing rose 0.6 percent in March after a 0.3 percent gain the month before. Also in durables, sizable gains in output also were recorded in the following industries: wood products, fabricated metal products, nonmetallic mineral products, and aerospace and miscellaneous transportation equipment.

Nondurables manufacturing rose 0.5 percent in March. Leading the boost were chemicals and paper.

On a year-on-year basis, overall industrial production posted at 5.9 percent-up from 5.6 percent in February.

Overall capacity utilization in March expanded to 77.4 percent from 76.9 percent in February. The March rate came in higher than the market forecast for 77.3 percent.

The manufacturing sector remains robust in March and April is also likely to be a healthy month according to a strengthened Empire State manufacturing report earlier this morning.

The traditional non-NAICS numbers for industrial production may differ marginally from the NAICS basis figures.
The Capacity Utilization figure is just sick. Numbers below the mid-eighty percentile show that we have much capacity that is going unutilized, and this comes after years of continuous manufacturing contraction. You would expect this number to rise sharply with a real recovery, and it simply isn’t.

The April Treasury International Capital (TIC) report came out showing a positive net inflow of $97.7 billion, mostly from “private” sources. I call complete bull on these figures knowing that the only way that type of money was flowing into the U.S. is if the “Fed” was first funneling freshly minted money out. Again, this and other reports from the Treasury are not to be trusted anymore in my opinion. They and the “Fed” are working too closely together and are failing to allow proper audits of their activities. No, I don’t trust them as far as I can throw them, and neither should you – if they had nothing to hide then a full audit would not be a problem.

“Consumer” Sentiment also magically rose despite $4 gasoline. It went from a gutter level 67.5 reading to a curb reading of a whopping 69.6. This reading is far below historical norms.

Every day that more fluff is added to the markets and to commodities is just more misallocation that will come out later. I’m working from my little laptop this morning, so will end this here and wish you a good weekend.