10/10/2014
By Jennifer Coombs

While the Dow Jones Industrial Average and the S&P 500 got some reprieve on Friday, the NASDAQ is another story. The tech-heavy index took a nosedive after semiconductor Microchip Technology (MHCP) cut its sales outlook for the quarter and warned investors to expect bad news from semiconductor tech-related stocks in the sector. We note that chipmakers are always vulnerable to bad news from competitors, so this is the root cause for the plummet in the NASDAQ and tech stocks. News is pretty bleak elsewhere in the world today as well. German stocks are getting slammed a day after the European Central Bank (ECB) president told the Federal Reserve that tighter fiscal policy on top of social work practices isn’t helping the Eurozone grow. The ECB also announced that it will be publishing the results of its stress test on October 26^th – this will be a major indicator of the health of European banks. A Reuters poll also showed that China’s economy most likely grew at its weakest pace in more than five years. Not to mention, Japan is in big trouble as a huge typhoon could make landfall this weekend. While details of the Treasury Budget will be released this afternoon, there is one major economic report moving the market today…

Domestic cross-border inflationary pressures remain indifferent as US import prices declined by 0.5 percentage points in September for the third month in a row. Year-over-year, import prices are well into the deflationary phase at -0.9%. A major decline in petroleum prices was the primary reason for the decline; down 2.0% in the month and down 6.6% over last year. However even when petroleum in excluded, import prices fell by 0.2% for the month and year-over-year prices increased by 0.7%. On the export side, prices fell 0.2% in September for the second consecutive month of declines and were also down 0.2% over last year. Agriculture prices are a major component of exports and were down a whopping 0.9% for the month and 2.9% over last year. However, when agriculture is excluded, export prices still declined 0.2% for the month and were unchanged versus last year. On both the import and export sides, the prices of finished good remains extremely flat with exported capital goods showing the only increase in September at +0.1% and the exported consumer capital goods (excluding autos) showing the deepest decrease at -0.2%. Over last year, prices of imported consumer goods (excluding autos) had the greatest increased at +0.9% while imported motor vehicle showed the greatest decrease at -0.7%.

Strength in the dollar is primarily what’s containing import-price inflation, and this has the doves at the Federal Reserve worried that inflation will remain below the 2% policy target. The price of oil continues to decline and this is another negative point for the outlook on inflation. All-in-all, the import-export report will increase deflationary concerns and should point to another month of soft readings for the Producer Price Index (PPI) and Consumer Price Index (CPI) reports which will be released next week.

Jennifer Coombs
Wall Street Strategies

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