MarketView for June 13

Summary

The major equity indexes were sharply higher on Thursday after three days of losses as stronger-than-expected economic data helped soothe concerns over the possibility of a near term winding down of the Federal Reserve's QE3 program.

Despite the rally, the S&P 500 failed to hold significantly above resistance at its 14-day moving average of 1,636.26. Support kicked in earlier in the day after the index traded below its 50-day average and again near 1,600.

Before the market opened, government data showed retail sales rose more than expected in May and first-time applications for jobless benefits fell last week, suggesting resilience in the economy.

Stocks had fallen every day this week up today on concern the central banks of the world would soon begin to wind down their stimulus measures. Trader angst increased after the Bank of Japan decided not to take any new measures on Tuesday, triggering a sell-off in Japanese equities and a rally in the yen.

Despite rallies in U.S. stocks and the yen, they both have strengthened of late their inverse correlation as bets against the Japanese currency were being used to finance long positions in Wall Street equities. The 200-day correlation between the S&P 500 index and the Japanese Yen currently stands at -0.92, near its strongest inverse correlation in more than four years. The yen hit its strongest in the session at 93.78 per U.S. dollar but lost momentum to trade above 95 after the closing bell.

Besides the strong economic data, merger and acquisition activity helped the bullish sentiment. Shares of Gannett were up 34 percent to close at $26.60 after it announced plans to buy television company Belo for $1.5 billion. Belo ended the day up 28.3 percent to close at $13.77.

Safeway rose 7.4 percent to $24.82 a day after Empire said it would buy Safeway's assets in Canada for $5.7 billion.

Shares of William Cos, parent of Williams Olefins, briefly hit their lowest this year at $32.55 after a deadly explosion and fire hit the company's chemical plant in Louisiana. Shares closed down slightly less than 1 percent at $33.70.

Shares of Coty fell in their market debut, taking the gloss off the third-largest U.S. IPO this year. Coty lost 0.8 percent to $17.36.

A recent report showed total estimated outflows from long-term mutual funds were $11.53 billion for the week ended June 5, of which $10.9 billion came from bond funds. The figures from the Investment Company Institute showed outflows from stocks, though trending lower, have continued in the past weeks, indicating the recent selloff in bonds has not translated into support to equities.

About 6.3 billion shares changed hands on the three major equity exchanges, a number that was slightly below the daily average this year of nearly 6.38 billion shares.

There is Underlying Tone of Strength in the Economy

Retail sales rose more than expected in May and first-time applications for unemployment benefits fell last week, signs of economic resilience in the face of belt-tightening in Washington.

The data on Thursday suggested rising home prices and steady job gains, which hoisted consumer confidence to multi-year highs in May, was starting to create a virtuous cycle in which gains in spending were forcing employers to keep hiring.

Policymakers at the Federal Reserve have helped the process with a muscular easing of monetary policy that pushed mortgage rates to record lows earlier this year.

Retail sales increased 0.6 percent after edging up 0.1 percent in April, the Commerce Department said. Economists had expected sales to rise 0.4 percent.

A 1.8 percent surge in motor vehicle purchases last month helped lift retail sales, which account for about 30 percent of consumer spending. It was the largest increase in auto sales since November. A sizable 0.9 percent gain in receipts at stores selling home-building materials also helped.

Core sales, which strip out automobiles, gasoline and building materials, and correspond most closely with the consumer spending component of gross domestic product, increased 0.3 percent after rising 0.2 percent in April. The increase in core sales offered hope consumer spending would not slow too much in the second quarter, even though it fell in April for the first time in a year.

JPMorgan now expects consumer spending, which accounts for 70 percent of U.S. economic activity, to grow at a 2 percent annual pace this quarter, up from a previous forecast of 1.7 percent. Morgan Stanley raised its spending forecast by two tenths of a percentage point to a 2.3 percent rate.

Consumer spending expanded at its fastest pace in two years in the first quarter, lifting the economy to a 2.4 percent growth rate.

In a separate report, the Labor Department said initial claims for state unemployment benefits declined 12,000 to a seasonally adjusted 334,000 last week. The data suggested that the recent pace of steady job gains continued in early June.

Taken together, the sales and jobs market data indicated a pick-up in economic momentum after a slow start to second quarter that could move the Fed closer to a decision to ratchet back on the $85 billion in bonds it has been buying each month.

Still, it was unlikely to convince the central bank to make any changes at a meeting on Tuesday and Wednesday, particularly given that the manufacturing sector is struggling.

A second report from the Labor Department showed no sign of imported inflation, which could keep domestic price pressures subdued and the Fed cautious about removing stimulus too early.