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Thursday, March 15, 2012

A host of data this morning reconfirms the favorable view of the domestic economic backdrop that has been taking hold for a while now. We have further evidence of an improving U.S. labor market from the initial Jobless Claims data. The wholesale inflation data appears to show some pricing pressures building in the supply chain, but there is no reason to doubt the Fed’s assuring comments from last week that inflationary pressures will likely prove to be temporary. We also got a better than expected read from the New York Fed’s Empire State survey this morning, showing continued momentum on the manufacturing side.

Initial Jobless Claims came in better than expected last week – down 14K to 351K from 365K. The prior week’s tally modestly revised up from the originally reported 362K level to 365K. The four-week average, which smoothes out the week-to-week fluctuation, remained unchanged at 355K. The strong Jobless Claims showing is consistent with the labor market recovery that we witnessed with last Friday’s non-farm payroll reading of 227K jobs gains in February. We should continue to see 200K+ monthly jobs numbers in the coming months as long as this trend continues, which is a huge positive for the U.S. economy.

In other economic news this morning, the February Producer Price Index (PPI) came in tad hotter on the ‘headline’ at up 0.4% vs. an increase of 0.1% the month before. The ‘core’ reading, which strips out the food and energy components, came in-line with expectations at up 0.2% vs. an increase of 0.4% in January. We will get the February CPI report tomorrow. The New York Fed’s Empire State manufacturing survey for March came in better than expected, showing continued resilience in the manufacturing sector. We will be getting another regional manufacturing survey in the Philly Fed report a little later.

In corporate news, Cisco (CSCO - Free Report) announced the acquisition of U.K.-based NDS Ltd, a developer of set-top box software, for $4 billion. We also have weak guidance from Guess (GES - Free Report) and announcement of a secondary equity offering from Capital One (COF - Free Report) to fund a recent acquisition.
The overall favorable domestic economic scene is showing up in the break-down of the negative correlation between the stock market and the exchange value of the greenback. Over the last few years, dollar strength would always show up in weak equities. It is still too early to draw firm conclusions, but the inverse relationship appears to have started to reverse following last week’s Fed meeting. The reason for this is that the positive U.S. economic outlook more than offsets the drag that typically results for the corporate sector from a strong dollar. The dollar’s strength this time around is a function of the lower odds of further quantitative easing from the Fed, resulting in the uptrend in treasury bond yields over the last few days, and not the flight-to-safety trades that we have typically been seeing over the last few years. This is a big net positive, showing that equity investors are fine with a world that isn’t propped up the Fed alone.

Sheraz Mian
Director of Research

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