Philly Fed Declines, Headline Reaction vs.The Deeper Dig

June 18, 2010 9:36 am

There have been many headlines that spooked investors lately. Just last week, the retail sales number showed a decline of 1.2%, but when we looked further, it was clear that a majority of that was from building and construction declines.

The same could be said about the recent release of the Philly Fed. Much of the downturn was due to the labor markets, which we know is not picking up with any speed. Still, pessimists will look to this to try to pour more fuel on the fire of an immediate slowdown. We think that it will take an actual number that is consistency on the contraction side to derail the upward move of the markets during this technical rally.

So far, there is clearly a bid in equities as the 1,040 support gets further away and institutions get more comfortable with the 200-day MA levels.

From our friends at Briefing.com

Philly Fed Declines, But Not as Bad as the Headline Suggests
General business activity in the Philadelphia region slowed in June as the Philadelphia Federal Reserve’s Business Outlook index declined from 21.4 in May to 8.0. The Briefing.com consensus called for the index to drop to 20.0.

The details of the data do not reveal nearly as much of a weakening as the headline number suggests.

New orders expansion continued during the month and actually picked up a little steam as the index climbed from 6.1 in May to 9.0 in June.

Unfilled orders contracted for the fourth consecutive month, but the rate of decline slowed significantly as the index increased from -3.0 in May to -0.1 in June.

Shipments growth decelerated in June as the index declined from 15.8 to 14.2. However, its current rate is still stronger than what the index revealed in March and April.

Taken altogether, the data signal continued strength in production over the next couple of months.

The drop in the index was mostly due to poor profit potential and employment.

The prices paid for supplies index decelerated from 35.5 to 10.0, but remains firmly entrenched in an expansion cycle. Unfortunately, disinflationary pressures have resulted in firms having to cut back on the prices of the goods they sell. A continued trend where prices paid for supplies cannot be passed through to manufacturers’ customers will weaken profits in the near term.

The employment index reentered a contraction phase as the index dropped from 3.2 in May to -1.5 in June. This is the first time the index has fallen below zero since November 2009.

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