The Nitty Gritty Details:
U.S. stocks opened near unchanged this morning, giving up early gains after first quarter GDP was not revised higher (as had been expected) and weekly jobless claims unexpectedly rose. Risk assets had gotten some support early this morning after a report that China was interested in buying more EU bailout bonds, which boosted the euro. European markets are making little headway as Greek debt concerns persist and the market digests recent evidence of slowing growth. Asian stocks closed solidly higher led by a nearly 3% jump in the Korean Kospi Index on improving consumer confidence. Japan staged a strong rebound of its own, rallying 1.5%. Commodities are mixed this morning, with metals down modestly, crude flat, and most key agriculture prices higher. After getting a boost from yesterday’s weekly inventory data, oil is taking a pause as growth concerns offset the weaker dollar and heightened geopolitical risk.
Looking back at Wednesday, the S&P 500 avoided its fourth straight losing session thanks in large part to another strong day for resource-related stocks. The market seemed determined to push higher despite a weak durable goods report and some earnings disappointments. While Energy and Materials topped the sector rankings, Technology shrugged off some weak guidance and gained 0.5% overall. By contrast, all four defensive sectors underperformed and all but Health Care declined. The broad commodity indexes rose by between 1.5 and 2%, while particular strength in crude, copper, silver, and wheat, with the later getting a boost from European drought conditions.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
- Durable goods orders and shipments for April are weak with continuing Japanese impacts and weather-related issues. The drop in both the headline and core (nondefense capital goods excluding aircraft) readings on durable goods orders in April are a disappointment, and are the latest in the recent trend of such reports for March and April. The news is not all bad, however, as the April durables report was almost certainly impacted by the aftermath of the earthquake in Japan. Japanese industrial production fell at an 86% annualized rate between February and March, and that weakness spilled over into the March and April data in the United States. There were also sizeable upward revisions to both the orders and shipments data in February and March, which helps take some of the sting out of the weak April report.
- The FDIC’s quarterly banking profile confirmed that revenues were down year-over-year for the banking system, but profits boomed. Profits were up 66% versus Q1 2010 as lenders set aside less in reserves for bad loans. The recent improvement in business lending is encouraging, but bank stock performance continues to be dragged down by the unrelenting negative mortgage (foreclosure) headlines as well as tepid consumer loan growth and depressed interest rates. A flatter yield curve and low absolute rates hurt profitability.
- Weekly mortgage applications posted a 1.1% week-over-week gain in the week ending May 20th, the fourth consecutive week-over-week gain. This is a hopeful sign for housing as we are now in the midst of the key spring/summer selling season. Sales in March, April, May and June account for nearly 40% of all sales. A sharp drop in mortgage rates over the past six weeks (from 5% in early April to 4.6% last week) has probably pushed some potential homebuyers off the sidelines and into the market.
- Initial claims for unemployment insurance move higher in the latest week, but are still subject to distortion. 424,000 people filed claims for unemployment insurance in the week ending May 21st, approximately 10,000 more than in the prior week but still 65,000 fewer than the recent peak in claims (478,000) hit on April 30th. Claims are always volatile, which is why market participants look at claims on a four-week moving average basis. Over the past four weeks, an average of 438,500 claims were filed each week. The recent low in the four-week average on claims came in mid-March (just prior to the earthquake in Japan) at 388,000. It certainly appears that the Japanese situation and major weather events have distorted the data recently. An even bigger distortion is on its way as the nation’s auto plants embark on their annual summer shutdowns, always a source of volatility for the claims data. We will continue to follow these metrics, as they are a crucial piece of “real time” information on the economy.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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