MarketView for June 17

Summary  

Stock prices were a bit higher on Thursday; due mostly to an ongoing rally that has been gaining momentum throughout the week after the S&P 500 broke through its 200-day moving average. Nonetheless, the markets were under water for much of the day as weak reports on regional manufacturing and jobless claims continued to underscore concerns regarding the strength of the economic recovery.

As a result, you saw defensive sectors, such as consumer staples and utilities, add to the day’s gains. Procter & Gamble ended the day up 0.9 percent to $61.76 recovering some of the week’s prior losses. On the Nasdaq, Apple reached a lifetime high at $272.90 after the company said it sold more than 600,000 units of its new iPhone. Its shares closed up 1.7 percent at $271.87.

Inflation, Higher Interest Rates…Forget It

New claims for unemployment insurance were higher again last week while consumer prices chalked up their largest decline in nearly 1-1/2 years during the month of May. Initial claims for state unemployment benefits increased by 12,000 claims to a seasonally adjusted 472,000 as manufacturing, construction and education sectors shed workers, the Labor Department said.

Financial markets had expected claims to fall to 450,000. Last week's data was in the survey period for the government's closely monitored employment report for June. A Labor Department official said states had reported claims in manufacturing, construction and education sectors. The logical end result is that it is virtually assured that the Fed will allow interest rates to remain at their low level for the foreseeable future.

Indicators of a possible retrenchment in economic growth became apparent on Thursday after a report indicated that factory activity in the country's Mid-Atlantic region fell to its slowest rate of increase in 10 months during June. The employment gauge fell to its lowest level since November.

Part of the problem will likely be that the debt crisis that started in Greece and will likely spread to some degree within the EU, may also take a small bite out of our growth. Furthermore, for a labor market that is struggling, the head winds of any type will prove to be problematic.

In a second report, the Labor Department indicated that its seasonally adjusted Consumer Price Index fell 0.2 percent last month, the largest decline since December 2008, after dipping 0.1 percent in April. Consumer prices had been forecast to slip 0.2 percent in May. In the 12 months to May, the CPI rose 2 percent, slowing from the 2.2 percent rise the prior month, also in line with market expectations.

In May, energy prices fell 2.9 percent, the largest decline in more than a year. With energy costs falling, gasoline prices tumbled 5.2 percent - the largest decline since December 2008. Food costs were flat for the first time since October.

Excluding the volatile energy and food prices, the so called core measure of consumer inflation edged up 0.1 percent after being flat in April.

The Philadelphia Federal Reserve Bank's business activity index dropped to 8.0 in June from 21.4 in May. That was well below economists' expectations for 20.9. A reading above zero indicates expansion in the region's manufacturing.

Although the recovery is showing some weakness, expansion continues at a moderate pace. The Conference Board's leading index, which tries to predict future levels of economic activity, rose 0.4 percent to a record 109.9 in May, after stagnating in April, another report showed.

A near 10 percent unemployment rate is hurting President Barack Obama's approval ratings, and dissatisfaction with the economy could cost the Democratic Party control of Congress in November's mid-term elections.

With unemployment still high and inflation pressures muted, the Federal Reserve is expected to extend its pledge for low interests rates. The U.S. central bank, which meets on Tuesday and Wednesday, is not seen lifting overnight interest rates from near zero until next year.

In the 12 months to May, the core inflation rate rose 0.9 percent after increasing by the same margin in April. The rise was also in line with market expectations.

Consumer Prices Show Largest Drop in 1-1/2 Years

Consumer prices recorded their biggest decline in nearly 1-1/2 years in May as energy costs dropped, according to a government report on Thursday that pointed to tame inflation pressures and low interest rates.

The Labor Department said its seasonally adjusted Consumer Price Index fell 0.2 percent last month, the largest decline since December 2008, after dipping 0.1 percent in April.

Analysts polled by Reuters had forecast consumer prices slipping 0.2 percent in May. In the 12 months to May, the CPI rose 2 percent, slowing from the 2.2 percent rise the prior month, also in line with market expectations.

The data followed a report on Wednesday showing prices received by farms, factories and refineries fell last month. Inflation remains a distant threat as the economy slowly recovers from the longest and deepest recession since the 1930s.

The Federal Reserve is expected to extend its ultra low interest rate policy next week and is not seen lifting overnight interest rates from near zero until next year.

In May, energy prices fell 2.9 percent, the largest decline in more than a year. With energy costs falling, gasoline prices tumbled 5.2 percent - the biggest drop since December 2008. Food costs were flat for the first time since October.

Excluding the volatile energy and food prices, the closely watched core measure of consumer inflation edged up 0.1 percent after being flat in April.

Analysts had expected core prices to rise 0.1 percent. The monthly core inflation rate was bumped up by increases in costs at hotels and motels, and for apparel, tobacco, medical care and used vehicles.

In the 12 months to May, the core inflation rate rose 0.9 percent after increasing by the same margin in April. The rise was also in line with market expectations.