Trouble Ahead for U.S. Treasury Rating?

Trouble Ahead6/03/11: 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:

The weak May jobs report, including a slight increase in the unemployment rate, drove stocks down more than 1% in early trading this morning.  The report adds to the plethora of recent evidence suggesting that the pace of the economic recovery slowed meaningfully in May.  International markets are broadly lower on growth concerns emanating out of the U.S.  Meanwhile, speculation that another rate hike was forthcoming from China’s central bank is adding to the market’s cautious tone.  Growth fears and the Treasury rally are pushing gold higher this morning, while economically sensitive energy and metals are broadly lower.  Supply fears are propping up agriculture prices, which are mostly flat or higher despite the global selloff in risk assets.

Looking back at Thursday, the market session was decidedly choppy.  The Nasdaq managed a modest gain Thursday as the Technology sector rose slightly, while the Dow and S&P 500 fell modestly in a mixed session.  May sales from retailers largely missed expectations, failing to help calm market jitters that have arisen in recent weeks amid a string of disappointing economic data and ongoing Greek default concerns.  Industrials topped the sector rankings as a major mining equipment maker provided a strong outlook, while Consumer Staples fell most on broad based weakness.  Crude was flat as a weak dollar offset a bearish inventory report, while the start of hurricane season and a bullish inventory report drove natural gas prices higher.

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

The Markets Broken Down:

  1. The weak May employment report confirms a lull in economic activity. The private sector economy created just 83,000 jobs in May, far short of lowered expectations, which have been falling dramatically this week.  Despite the disappointment, the private sector economy has created jobs in 15 straight months, totaling 2.2 million, but there is still a long way to go to recoup the 8.8 million jobs lost in the Great Recession.  Despite some recent extraordinary factors adding to the recent anemic employment numbers (earthquake in Japan), the report would have represented a deceleration in job creation anyway relative to recent trends.
  2. Moody’s warns of a possible downgrade to U.S. Treasuries. Moody’s stated that lack of progress on raising the debt limit may lead to U.S. Treasuries being placed on watch for a downgrade in July.  This language is stronger than that of S&P in April.  Moody’s went as far to say that any potential disruption to Treasury payments resulting from the debt limit would likely be very short-term in nature and result in a downgrade to AA.  In late 1995, Moody’s placed approximately $300 billion worth of Treasuries on watch for downgrade (that ultimately never came to fruition), a move that Treasuries largely ignored.
  3. Next week’s economic calendar is light, with the main highlight being the Fed’s Beige Book. The week after the release of the monthly jobs report is typically a quiet one for economic data, and next week fits that pattern.  Other than the usual weekly readings on retail sales, initial claims for unemployment insurance and mortgage applications, there are no market moving reports due out.  The Fed will release its Beige Book, a qualitative assessment of economic and business conditions in each of the 12 regional Federal Reserve districts.

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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