Market Analysis

Bonds opened slightly worse this morning but have moved closer to break even.  The big news today is the Facebook IPO which was priced at $38 per share.  Trading has been a bit volatile. Currently the price is at $40.58 per share.

In global news, Asian  markets were down on jitters about Europe and concerns about housing in China and projections that growth might slow down to 7.5%.  In Europe equity markets were down on credit downgrades of banks in Spain.  In Geece there are conflicting poll results about where the country wants to go.

Bonds opened weaker but have moved into positive territory following a weaker than expected May Philadelphia Fed Region Business Conditions Survey which came in down 5.8 vs expectations for a positive 8.8 reading. For those interested in seeing what these regional surveys look like you can visit http://www.philadelphiafed.org/newsroom/press-releases/2012/051712a.cfm

In separate economic news, Initial Jobless Claims for the week ended 5/12 came in at 370,000 vs expectations for a 365,000 figure.  The Conference Board's April Leading Indicators index came in down .1% vs expectations for an increase of .2%.

In global economic news, Japans 1st Qtr GDP grew 1% and at an annualized pace of 4.1%.  Analysts are attributing that growth to govement spending in the aftermath of their earthquake and nuclear plant disaster last year and also to a goverment initiative to spur the sale of more environmentally friendly cars.  Both of these measures are temporary.  In Greece no major news today.  A June 17 election is currently expected where the Greeks can either elect a coalition who are for continuing on the austerity path or a coalition who uses the public outrage over austerity to chart a new path.  European Union officials have made it clear that an election against austerity is an election to leave the EU. 

Bonds opened worse and then improved in the afternoon.  Stocks opened better then turned worse.  Markets were reacting to concerns raised in the minutes of the last Federal Reserve Open Market Committee Minutes about the risks to the economy posed by the issues in Europe and by inaction in Congress.

In economic news today, April Housing Starts came in at an annualized pace of 717,000 units vs expectations for a 680,000 figure.  Also March Starts were revised up from a pace of 654,000 to 699,000.  April Building Permits came in at an annualized pace of 715,000 vs expectations for a 730,000 pace.  March Permits were also revised higher from a pace of 747,000 units to 769,000 units.  Separately April Industrial Production came in up 1.1% vs expectations for a .5% increase.  March Production was revsed downward from unchanged to a decline of .6%.  April Capacity Utilization came in at 79.2% vs expectations for a 79.0% figure.

Bonds are flat with a slight negative bias today in response to a better than expected NY region manufacturing report and stronger than expected GDP growth figure out of Germany.  Germany's 1st Qtr 2012 GDP grew at .5% vs an expected .1% growth.  Germany's better results pulled the remainer of the EU up to unchanged which allowed it to avoid 2 consecutive quarters of negative growth which is generally considered the definition of a recession.  Stocks finished on a negative note today on continued fears about the political situation in Greece.

US economic data today was mixed.  April Retail Sales were up .1% vs expectations for a .2% increase.  Retail Sales ex-Auto were also up .1% vs expectations for a .2% increase.  The April Consumer Price Index (CPI) was unchanged and the Core CPI (excluding food and energy) was up .2% which matched expectations.   The May Empire (NY) Manufacturing index was up to 17.1 vs expectations for an 8.4 reading and a 6.6 reading in April.  March Business Inventories were up .3% which matched expectations.

Bonds are improved again, however the spread between the 10 Yr US Treasury bond and mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac is widening. The yield on the 10 Yr is down to 1.78%. Some MBS like the Fannie Mae 3.5% 15 yr are actually worse this morning. Among other differences, MBS have early payoff risk which makes them riskier investments. If investors pay a premium for the securities and the pool of loans they purchased experiences higher than expected payoffs, then the performance of the pool based on the premium price can be impacted.

Driving the markets today are further concerns about Europe after the anti-austerity parties were unable to create a coalition government in Greece. Also, over the weekend, the political party of German Chancellor Merkel lost a challenge to an incumbent in statewide. The news headlines are calling the election a loss implying that Merkel’s Christian Democratic Union lost control of a majority in North Rhine-Westphalia — Germany's most populous state. However, the winning coalition led by Hannelore Kraft of the centre-left Social Democrats (SPD) was already running a majority government in the state. National polls show support for Merkel's stance in the debt crisis and Merkel's conservatives as the biggest party in Germany.

This week’s economic calendar is vacant on Monday and Friday but very active Tues-Thursday. Below is a summary of the key reports.

Monday, May 14 – economic calendar vacant

Tuesday, May 15

• April Retail Sales – Expected up .2% vs up .8% in March. Excluding the automotive component expected also up .2% vs up .8% in March.
• April Consumer Price Index (CPI ) – expected unchanged vs up .3% in March. Excluding food and energy, the Core CPI is expected up .2% vs up .2% in March.
• May Empire (NY) Manufacturing Index – expected 8.4 vs 6.6 in April.
• March Business Inventories – expected up .3% vs up .6% in February

Wednesday, May 16

• April Housing Starts and Building Permits – Starts expected up to an annualized pace of 680,000 units vs a pace of 654,000 in March. Permits expected down to an annualized pace of 730,000 vs a pace of 747,000 in March.
• April Industrial Production and Capacity Utilization – Production expected up .5% vs unchanged in March. Capacity Utilization expected up to 79.0% vs 78.6% in March.
• Federal Open Market Committee (FOMC) 4/25 meeting minutes released – investors will be looking for clues to another Fed easing move. While markets are currently pricing a larger probability of a move, most analysts do not believe a consensus exists within the Fed at this time for more quantitative easing through bond or MBS purchases.

Thursday, May 17

• Initial Jobless Claims Week ended 5/12 – expected 365,000 vs 367,000 the prior week
• May Philadelphia Fed Business Conditions Survey – expected 8.8 vs 8.5 in April
• April Conference Board Leading Indicators – expected up .2% vs up .3% in March

Friday, May 18 – economic calendar vacant

Stocks are up slightly and bonds are also slightly improved.  Stocks are responding to a better than expected May Consumer Sentiment Index and relief from falling oil prices which investors hope will provide a boost to consumer spending.  Bonds are responding to a better than expected April inflation report.

In economic data today, the May Univ of Michigan Consumer Sentiment Index came in at 77.8 vs expectations for a 76.0 figure.  The April Producer Price Index (PPI) came in down .2% vs expectations for no change.  Excluding food and energy, the Core PPI was up .2% which matched expectations.

At least for this morning, selling pressures have eased on stocks.  The Dow and S&P 500 are up slightly.  The Nasdaq is very slightly down.  The 10 Yr US Treasury has moved back to its resistance level of 1.90%.

In economic news, Initial Jobless Claims for the week ended 5/5/12 came in at 367,000 vs expectations of a 365,000 figure.

Stocks continue to experience selling pressure in response to changes in leadership in France and Greece.  Doomsday scenarios are being floated again about sovereign defaults and bank failures in Europe. 

While it is always possible that doomsday scenarios could materialize, so far Europe has shown resilience to financial shock.  The European Union has the largest GDP in the world.  A ranking can be found at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html?countryName=European%20Union&countryCode=ee&regionCode=eur&rank=1#ee ) 

The real take away from the European elections is that implementing austerity measures equates to political suicide.  Politicians wanting to address the economic crisis will need to focus on economic growth as the way forward.  While government waste needs to be eliminated and the growth of social programs needs to be controlled, politicians who promote those objectives will need to have those items be subthemes to a larger platform that identifies ways to stimulate additional economic activity. 

The economic calendar is vacant today in the US.

Stocks are down and bonds improved slightly this morning in response to further European uncertainty after the fall of French President Sarkozy to Socialist Party candidate Francois Hollande. Reaction is somewhat muted though because many analysts agree that the European Union austerity measures pushed through by Sarkozy and German Chancellor Merkel last year may be creating a deeper problem in the short term.

This week will be a light week for US economic data, with the only key data points being Initial Jobless Claims for the week ended 5/5/12 on Thursday (expected to remain flat at 365,000) and then the April Producer Price Index (PPI) on Friday which is expected to be unchanged. The Core PPI (excluding food and energy) is expected to be up .2%. Also on Friday, the Univ of Michigan initial May Consumer Sentiment Index is expected to come in at 76.2 vs 76.4 for April.