MarketView for July 1

 

 

Summary  

 

Share prices hit the skids again on Thursday as the first day of a new quarter fell victim to heightened fears of a double-dip recession before Friday's key employment report. The major equity indexes were lower for a fourth straight day after suffering their worst quarter since late 2008, although there was a mini-rally as the normal trading day wound down. Meanwhile, attention appeared to move away from euro-zone debt concerns to our own domestic economic data, which is starting to paint a picture of a slowdown in the economic recovery as the euro rose over 2 percent against the dollar.

 

Indicators suggested markets were oversold, but fears of a worse-than-expected jobs report, exacerbated by Thursday's jobless claims data, kept buyers on the sidelines. Gold mining company stocks were among the hardest hit on Thursday after being one the few strong sectors in the second quarter as the price of gold fell. Shares of Barrick Gold fell  5.2 percent to $43.06 and Newmont Mining was down 4.5 percent to $59.99.

 

Thursday's data also included the Institute for Supply Management's barometer of U.S. manufacturing activity, which fell to its lowest level since December and pending home sales, which dropped a record 30 percent in May. Other data showed unemployment claims rose unexpectedly last week, heightening fears a labor market recovery was stalling.

 

Ford Motor was up 4.9 percent to $10.57, making it one of the bright spots after the automaker reported June sales gained 15 percent.

 

Jobless Claims Up Unexpectedly

 

New claims for unemployment insurance benefits rose last week, much to the surprise of Wall Street, while manufacturing activity and employment slowed in June. As a result, the Street was once again on edge over the possibility of a double dip recession. Initial claims for state unemployment benefits increased 13,000 to 472,000, the Labor Department said, above market expectations for 452,000.

 

In the Labor Department report, the four-week moving average of new jobless claims, considered a better measure of underlying labor market trends, rose 3,250 to 466,500 -- the highest level since early March.

 

More than 8 million Americans lost their jobs during the recession, but employment growth has been so tepid that it could take years for many of them to find work again. The claims data has no implications for the June employment report due on Friday as it falls outside the survey period.

 

However, on the other side of the coin, the production side of the economy continues to expand, though less briskly than earlier. In a separate report, the Institute for Supply Management said its barometer of manufacturing activity slipped to 56.2 in June from 59.7 the prior month, with growth in the employment index moderating slightly.

 

While layoffs have slowed sharply from early last year, businesses remain skeptical of the strength of the recovery and are holding back on hiring, keeping claims for unemployment benefits at uncomfortably lofty levels.

 

Manufacturing has largely led the recovery from the longest and deepest recession since the 1930s. Data ranging from retail to home sales has hinted at a slackening in the recovery that started in the second half of 2009.

 

Contracts for pending sales of previously owned homes fell  a record 30 percent in May to an all-time low of 77.6, a report from the National Association of Realtors showed, following the end of a popular homebuyer tax credit.

 

Separately, the number of planned layoffs at U.S. companies rose slightly last month, but the level remained close to a four-year low, global outplacement consultancy Challenger, Gray & Christmas said. Employers announced 39,358 planned job cuts in June, up 1.4 percent from 38,810 in May. Announced layoffs touched a four-year low in April at 38,326.

 

Pending Home Sales Down 

 

Pending contracts for sales of previously owned homes fell a record 30 percent in May, far more than expected, after a popular tax credit expired at the end of the prior month, according to a survey released on Thursday by the National Association of Realtors.

 

According to the NAR,  its Pending Home Sales Index, based on contracts signed in May, fell to a record low 77.6 from 110.9 in April.

 

"Consumers are rational and they rushed to meet the tax credit eligibility deadline in April. The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June," said NAR chief economist Lawrence Yun.

 

First-time home buyers who had signed a contract before the end of April are eligible to receive $8,000 from the government. Buyers who are selling a home and buying a new home are eligible for $6,500.

 

The index is 15.9 percent lower than May 2009 and fell sharply in all regions of the country. Contracts fell 33.3 percent in the South, the country's largest region, and dropped 20.9 percent in the West. Contracts dropped 31.6 percent in the Northeast and fell 32.1 percent in the Midwest.

 

10-year Treasury At 14-month Low

 

Treasury debt prices rose on Thursday, pushing benchmark yields to their lowest level in 14 months. A surprise rise in weekly jobless claims, along with a bigger-than-expected fall in pending home sales and slower-than-forecast manufacturing growth once again brought to the forefront the nagging questioning of both the pace of recovery and whether we are heading for a double-dip recession.

 

Increased worries over the trajectory of the economy have resulted in the benchmark 10-year note gaining 13/32 to yield 2.89 percent, down from 2.94 percent late on Wednesday. Yields dipped to 2.88 percent in morning trade, the lowest since April, 2009. The 30-year bond rose 1-2/32 in price to yield 3.84 percent, also the lowest in 14 months, from 3.89 percent late on Wednesday.

 

The spread between yield on two-year notes and 10-year notes stood at 227 basis points on Thursday, with the yield curve the flattest since late September, 2009. Overall however, the curve remains relatively steep, still well up from levels below 100 basis points at the beginning of the recession in December, 2007.

 

Crude Less Than $75 per Barrel

 

The price of crude oil kicked off the second half of the year by dropping below $75 per barrel on Thursday, after falling nearly 5 percent in the first half of the year as signs of slowing economic growth in the U.S. and China fueled energy demand doubts.

 

The pace of China's manufacturing growth slowed in June as government steps to cool the property market and curb bank lending combined with a faltering global recovery in the world's second-largest oil consumer.

 

Sweet domestic crude for August delivery settled down $1.21 per barrel at $74.42 making it the fourth straight decline, while extending the 10 percent slide of the second quarter, the first quarterly drop since 2008. ICE Brent settled down $1.19 per barrel at $73.82.

 

Crude stockpiles fell 2 million barrels in the week to June 25, compared with expectations for a decline of 900,000 barrels. Cushing, Oklahoma, crude supplies shed 795,000 barrels to 36 million barrels. The recent slip from record high storage at the Cushing hub has helped narrow the price spread between the front-month and near-month U.S. crude contracts.

 

The spread narrowed to 55 cents on Thursday, from $1.27 on Wednesday, which could signal an improvement in near-term demand. Meanwhile, hurricane Alex drenched the Texas-Mexico border on Thursday as the powerful storm hit Mexico's Gulf coast, spawning tornadoes and flooding towns, but it spared U.S. oil wells.