Surprising US Data Today

Highlighted stocks include Johnson & Johnson (JNJ), Bristol Myers (BMY), Colgate Palmolive (CL), Exxon-Mobil (XOM) and Energy Transfer Partners (ETP).

This (Thursday) morning’s batch of economic data contained quite a few surprises, and the surprises went in different directions. Most surprising was the rise in the Producer Price Index (PPI) of 0.8% on a headline basis and 0.4% on a core (excluding food and energy basis). The consensus expectations were for increases of 0.2% and 0.1%, respectively.

A rebound in gasoline prices of over 15% was the key reason for the headline number being so much higher than expected, but the rise in the core seemed to be fairly broad-based. Those numbers only refer to the finished goods component of the PPI; at the intermediate goods level, the total index fell 0.7% while core was down 1.1% and on the crude goods level the total was down 2.9% while core was up 0.1%.

While this report is only a single data point, it does look like evidence that efforts by the Fed to prevent deflation might just be paying off. I count this as good news.

The Index of Leading Economic Indicators was also stronger than expected with a rise of 0.4% versus an expected increase of 0.1%. This is the second straight month of an increase in the leading index following a 0.2% rise in December, although that was revised down from an original reading of 0.3%.

While this is good news, keep in mind that over the last 6 months the index is down 1.9%. An increase in the money supply and the shape of the yield curve were the biggest reasons for the rise. Those 2 factors have been big positive contributors to the index in each of the last five months.

The coincident index, however, continued to decline - falling 0.5% in January following a 0.5% decline in December. That index is down 2.7% over the last 6 months. All in all, I consider this a very positive report.

On the negative side, the Philly Fed index came out at a negative -41.3, far weaker than the consensus expectation of a reading of -25.0 and last month’s 24.3%. This comes on top of a similarly dismal, and unexpectedly weak, reading for the Empire State Index yesterday. These indexes are essentially regional versions of the ISM index that will be released at the beginning of March.

These are very weak readings. The Philly index has been in negative territory for 14 out of the last 15 months, but this is the lowest reading since October of 1990. This is a very negative report.

Finally, new claims for unemployment insurance came in just slightly higher than expected at 627,000, matching last week’s figure (although it was originally reported at 623,000). The 4-week average rose to 608,500, a rise of 10,500 on the week.

Since the weekly claims number can be very volatile, it makes more sense to pay attention to the 4-week moving average. The 4-week average is quickly approaching its all time peaks reached in the 1982 downturn. To be fair, though, the size of the workforce is much larger now than in Reagan’s first term.

On the other hand, a smaller proportion of workers are covered by unemployment insurance, since there are more 1099 workers relative to W-2 workers. Still, all things considered, things on the employment front are not yet as bad as they were back then, though they seem determined to get there.

Continuing claims set yet another new record, and are now just shy of the 5 million mark at 4.987 million, an increase of 170,000 in just the last week. While the same caveats about the overall size of the population apply to continuing claims as new claims, this is still an extremely weak report.

Also note on the chart below (larger version available here) the increases in both continuing and new claims in earlier recessions tended to be quick spikes followed by rapid declines, the same has not been true for the last two recessions. However, even some sign that unemployment claims were starting to stabilize would be very welcome news at this point.

Technicians were probably very encouraged that the Dow (^DJI) was able to hold above its November lows yesterday in the face of very ugly data on housing and industrial production. We may be setting up here for a tradable rally, if you are the nimble type.

I don’t think the bear market is over, but within bear markets there can be some sharp moves higher. However, if you want to play, I would try to do it with big, safe, boring-type companies — those with lots of cash on the balance sheet and stable demand type products.

Some of those names would be firms like Johnson & Johnson (JNJ), Bristol Myers (BMY), Colgate Palmolive (CL), Exxon-Mobil (XOM) or perhaps a pipeline MLP like Energy Transfer Partners (ETP). Don’t try to be a hero, but you can nibble on some solid companies in here.

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