Most of the economic data in recent days has been consistent with a “less bad” economy, but with a twist.  After a month or two of “less bad” readings, expectations for economic indicators like employment and retail sales have started to trickle upwards.  While reported readings for these indicators in recent days were still “less bad” than prior months, the market’s response has generally been less positive — a change in behavior.  This may suggest one of two things.  One, that the markets are beginning to need signs of something more than simply “less bad” to get investors to position more aggressively from here or two, that we’re merely in pause mode after a significant run up.  I tend to think the latter, with a smaller dash of the former.

The inflation statistics released this morning continued to be benign for April, with the CPI declining .7% year over year and remaining flat month to month.  With energy prices prices rebounding at the pump and elsewhere as a function of stronger emerging market economies — particularly China — these numbers are likely to turn in coming months.  Some inflation, as we’ve said recently, could actually be seen as a positive for the economy.  Consumer confidence this morning was also improved and in fact the best reading since September.

As we said in our blog entry earlier this week, it is quite likely that if we are indeed in a recovery and not simply another bear market rally, we should see a shift in sector leadership in the coming weeks and months as a function of a recovery gaining additional traction.  The late cycle trade is something we’re watching and have been moving towards over the last few weeks.  

I am also intrigued by the potential impact of a falling dollar as a function of stronger relative growth in overseas economies and commodity markets.   Consumer staples stocks have fallen less than the market in the last year but have not enjoyed much of a rebound off the lows, consistent with what would expect for a more defensive sector.  However, I’m starting to think that this sector could show uncharacteristic outperformance into an economic recovery as a function of a falling dollar.  Many large consumer staples companies have significant sales exposures to overseas economies.  

Anyway, it’s something I’m thinking about. 

Boy, I sure am exciting, aren’t I?