Friday’s Economic Data is “Fed Friendly”

Smiley Face4/29/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened flat this morning following consumer income and spending data that showed a continued slow pace in consumer spending.  Today’s economic calendar also includes the New York and Chicago ISM/PMI surveys and the University of Michigan’s metrics on consumer sentiment.  Earnings news overnight was mixed.  European averages drifted lower and may snap a six-session winning streak (note that the UK market is closed for the royal wedding).  Hong Kong stocks fell for the fourth straight session as China rate hike fears permeate.  Silver and gold are higher again, while the dollar is lower and oil and gas are near unchanged.

Looking back at Thursday, U.S. stocks rose in a choppy session as earnings news was mostly well-received and more merger activity gave investors something else to talk about besides the Federal Reserve and the falling dollar.  The economic data, however, was mixed with better-than-expected pending home sales but a sluggish Q1 GDP report and higher weekly jobless claims.  Sector performance had a defensive tone with Utilities and Consumer Staples among the top performers, while Technology and Energy lagged on a tepid response to earnings reports.  Oil prices barely budged, but natural gas jumped more than 5% on a bullish inventory report.

The Markets Broken Down:

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. More on the economic data and its possible Federal Reserve impact. Numbers for the first quarter and March on employment costs, spending, incomes and inflation were benign, suggesting little if any wage inflation, low core inflation, and modest gains in income and spending.  The data suggest that the Fed can wait a little longer before beginning to remove the unprecedented monetary stimulus now in the system.  The Fed will be watching wages and wage inflation, inflation expectations, and how quickly the slack in the economy is being taken up as it decides on when it will begin to remove the stimulus.
  2. Corporate America is delivering strong growth. S&P earnings per share are tracking to an impressive 16% increase year-over-year compared to the 12% expected when earnings season began.  Revenues are tracking to a solid 9% increase versus initial expectations at 7.5%.  The key drivers on the top line have been strong growth in developing markets and strength in resource sector profits, while cost controls, effective management of supply chain disruptions in Japan and input cost pressures, and currency benefits from a weak dollar have helped the bottom line.  Yesterday’s GDP report, while sluggish versus Q4, did show very strong capital spending increases year-over-year in the mid-teens, consistent with the strong revenue growth we are seeing this earnings season.
  3. What accounts for the slowdown in GDP between Q4 2010 and Q1 2011? Economic growth slowed to 1.8% in the Q1 2011, a marked deceleration from the 3.1% rate of growth in Q4 2010.  However, we agree with the assessment made by Fed Chairman Bernake about Q1 GDP.  Bernake said, “most of the factors that account for the slower growth in the first quarter appear to us to be transitory.”  In addition, weather likely played a factor in the slower rate of growth in the first quarter.  Looking ahead, the Fed has already factored in the weak Q1 GDP report into its forecasts, and presumably the market has as well.  The pace of growth, the labor market, inflation, and inflation expectations are far more important for the markets and the Fed than the Q1 GDP report.
  4. Is the level of speculation in oil and gasoline similar to 2008? While it is difficult to accurately measure speculation, there appears to be “open interest” in futures contracts at levels that are actually slightly above the 2008 peak.  Open interest is the total number of outstanding futures contracts that are held by market participants at the end of each day.  So, using this as a measurement of speculation would suggest that more people are investing in oil futures contracts today than there were when oil spiked in 2008.

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
Wealth Consultant

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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