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Trade deficit largest on record

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Three economic reports released at 08:30 AM EST has seen downside reversals in the equity futures as weekly jobless claims, producer prices and U.S. trade deficit data have received somewhat of a negative reaction from the equity futures markets.

The December U.S. trade gap widened to a record $44.2 billion as exports of non-automotive capital goods, led by telecommunications equipment and civilian aircraft, came under pressure, the Commerce Department reported. The December trade gap was wider than expected. Economists were expecting a trade deficit of $39 billion deficit in December. The November trade gap was revised down slightly to $40 billion from $40.1 billion. December exports fell $2.1 billion, or 2.5%, to $81.2 billion. Imports rose 1.7% to $125.4 billion.

Producer prices jumped 1.6% in January, which was much higher than the 0.5% rise forecasted by economists. The jump in prices at the wholesale level was led by a 4.8% rise in energy costs and a 1.6% rise in food costs. The 1.6% monthly jump is the highest wholesale inflation seen in 13-years. The core rate, which factors out the more volatile energy and food components rose 0.9%, the biggest jump in four years. The bulk of the gain in the core inflation was due to a 3.5% increase in new car prices. Crude goods prices also increased 6.9% and intermediate goods prices rose 1.3%. Economists had forecasted the core rate of inflation to rise a marginal 0.1%. January's PPI and CPI were a major surprise to traders and have some thinking January's rise in this economic indicator isn't a one-time event. Still, the number show rising prices and put a major hole in recent theory that stagflation and deflation were looming over the economy.

In other economic news, the Labor Department said that the labor market softened in the past week as initial jobless claims rose by 21,000 to 402,000, the highest in seven weeks and only the second time above the 400,000 level this year. The four-week moving average, which smoothes out the week-to-week volatility rose by 4,750 to 394,750, the highest six weeks. The 21,000 rise in weekly jobless claims was more than double the 8,000 increase forecasted by economists.

S&P futures (sp03h) were trading about 6-points higher just prior to the release of this morning's economic data, but now hold a 0.50-point gain at 847.30. NASDAQ futures (nd03h) are holding a 3.5-point gain at 1,013, while Dow futures (dj03h) are up 12 points at 8,025.

The futures still show a slightly higher open for stocks at this point (09:00 AM EST) as fair value for the S&P 500 today is $-0.12. HL Camp & Company has their computers set for program buying at $0.56 and set for selling at $-1.62. Fair value for the NASDAQ-100 today is $1.01.

Treasuries have also seen a reversal from early morning selling and now trade unchanged across the 5, 10 and 30-year maturities. The benchmark bond, 10-year YIELD ($TNX.X) is currently at 3.879, after rising to 3.915% just after the release of this morning's economic data.

This morning higher than expected PPI and Core PPI data provides greater complexity for bond traders and investors. The data shows "inflation" at the producer level, which will catch Mr. Greenspan's attention and potential thought of interest rate increases. On the other hand, the perceived safety of Treasuries in "uncertain" times with a potential war with Iraq on the horizon has made Treasuries an attractive vehicle. Look for some rather choppy trade in Treasuries in the coming sessions as investors and bond traders sort this out.

A quick look at the gold futures markets has April Gold futures (gc03h) jumping $1.70 to 351.70 on this morning's PPI data and does reflect some trader's interest as gold is thought to be a hedge against inflation.

The widening trade deficit and some preliminary alert to inflation from the PPI data has the U.S. Dollar Index (dx00y) 99.90 -0.10% under some pressure. This is a dollar index where the U.S. dollar is weighted against 7 major foreign currencies.

A stock I've had my eye on in recent weeks that bullish traders may want to take a look at today is shares of copper producer Phelps Dodge (NYSE:PD) $34.80. The stock broke above its 200-day SMA on January 9th, and has been holding above this longer-term moving average in a consolidating sideways trading range. The intermediate-term 50-day SMA is on the rise and offers support at $33.56. The March Copper futures (hg03h) $0.75 +0.53% are edging back above their 50-day SMA as I type after a two-day dip below this intermediate-term moving average. The longer-term 200-day SMA is flat at $0.73.

Jeff Bailey

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