The Nitty Gritty Details:
Stocks opened near unchanged on the durable goods report. Durable goods orders, with and without transportation and defense, came in ahead of expectations for May, lifting futures to slightly above breakeven ahead of the open. Greece’s deal with the EU is also helping markets, although early gains faded at the open and stocks are down marginally in the opening minutes of trading. Overseas markets are mostly higher, though some selling pressure in Italian banks caused the European averages to pare gains. The Nikkei reached a three-week high, while hopes that Chinese inflation would soon begin to ease buoyed Asian sentiment. Commodities are mixed, with solid gains in copper and wheat, and some selling pressure on gold and silver.
Looking back at Thursday, stocks fell but pared losses on reports of the Greece deal. Global growth concerns that have weighed on stocks most of the past two months flared up again Thursday following an uptick in weekly jobless claims and weaker manufacturing surveys out of Europe and China. After a more than 1% drop early in the session, the news that Greece had agreed to austerity measures helped pull back losses. Company news was generally positive, though not good enough to lift the S&P 500 into positive territory. However, Technology and Consumer Discretionary did manage modest gains with help from well-received results from two significant national retailers. Crude fell over $4 to near $91 after the IEA (mostly the U.S.) announced it would release some crude from the Strategic Petroleum Reserve.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. Is it possible that the oil being released from the US Strategic Petroleum Reserve will be replenished at a lower cost? On the surface, the decision to release oil from the SPR was part of a coordinated global effort to replace supply lost due to the conflict in Libya. The surprise was in the timing, which came months after the onset of the conflict in Libya and after oil prices had dropped by 20%. The move is likely to have a short term impact on both crude and gasoline prices, and if prices keep falling, it may allow the Department of Energy to replenish the SPR with oil at a lower price than today. The real impact will be at the pump, where consumers are likely to see lower prices as we head into the heart of the summer driving season.
2. Manufacturing data for June is key to next week’s data reports. Reports on regional manufacturing conditions in June from the Dallas and Richmond Federal Reserve banks, and from the Chicago Area Purchasing managers will serve as a warm-up for the June reading on the Institute of Supply Management’s (ISM) report on national manufacturing activity. The ISM peaked in February 2011, and has moved down from a robust 61.4 to a more subdued 53.5. The market expects a further deterioration to 51.5 in June. That would be the lowest reading since the recovery got underway in June of 2009.
3. Durable goods orders rebound in May, but may weaken again in June as auto production shuts down. New orders for durable goods rose smartly in May, rebounding from a sharp earthquake induced drop in April. In addition, the April data were revised higher to show that the decline in orders was less severe than previously thought. The same pattern held on the shipment of durable goods, which are a proxy for the business capital spending portion of GDP. Looking ahead, however, while business spending looks to be on solid footing over the second half of 2011, that may not be the case in June, as many vehicle production plants shut down to accommodate the earthquake related parts shortages. Normally, auto plants shut down in early July.
4. The Federal Reserve seems to give mixed signals for the U.S. dollar – no QE III – but a lackluster outlook for growth. What is the net outlook? Over the longer term, the United States’ large current account and trade deficits, along with its unsustainably large budget deficit, combined with slow economic growth and only limited prospects for an increase in short term interest rates, will continue to put downward pressure on the U.S. dollar. A short term flight to quality on the European debt front or on global growth fears would act to push the dollar higher temporarily.
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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