MarketView for May 27

 

Summary  

 

What a difference a day makes as share prices galloped ahead on Thursday, more than making up for Wednesday’s loss as concerns eased on the world economic front after China refuted a report that it was reviewing its euro-zone bond holdings due to the region's debt crisis. Thursday's gains marked the largest advance for the S&P 500 on a percentage basis since May 10, although volume was below average.

 

Nonetheless, the S&P 500 closed above the 1,090 level, a technically important resistance level it has been unable to penetrate in the past week. Also being eyed as a significant indicator is a close above its 200-day moving average, which now stand right above the 1,104 mark.

 

China's denial was enough of a catalyst to entice buyers into the volatile equity market, which fell sharply from April highs as investors worried that Europe's debt woes would spiral into a larger financial crisis. The People's Bank of China said a Financial Times report that Beijing was concerned about its euro-zone exposure was groundless. The report had short-circuited a rally in the previous session.

 

Microsoft rose 4 percent to $26, a day after ceding its position to Apple as the largest technology company by market cap. At the same time, technology stocks in general rebounded after having been battered recently as a result of their higher concentration of overseas sales.

 

The CBOE Volatility Index .VIX, or VIX, known as Wall Street's fear gauge, fell 15.3 percent to 29.68, continuing its pattern of large swings since the S&P hit its April high.

 

Data showing the U.S. economy grew at a slower pace than expected in the first quarter was not enough to keep the Street from going bottom fishing after bargains created by the recent declines by the major indexes dropped.

 

Meanwhile, the Labor Department released its latest  new applications for state jobless benefits dropped to 460,000 last week from 474,000 in the previous week.

 

Pfizer rose 1.7 percent to $15.37 after the company said it would stop recruiting patients for a clinical trial for its heart drug Inspra because the study reached its main efficacy goal early.

 

In earnings news, both Costco Wholesale and Tiffany reported quarterly earnings that exceeded expectations. Tiffany also raised its outlook. Costco advanced 4.9 percent to $58.74. Tiffany shot up 7.5 percent to $46.86.

 

GDP Lower Than Initially Reported

 

The economy grew at a slightly slower pace than previously estimated during the first quarter although the recovery still appeared solid, suggesting the economy could withstand fallout from the European debt crisis.

 

Gross domestic product increased at a 3 percent annual rate, the Commerce Department said on Thursday, a number that was slightly below the Department’s initial estimate of 3.2 percent. That surprised the Street. Word was that expectations were for an expected growth of 3.4 percent after monthly data pointed to stronger consumption and capital spending.

 

Although economic activity slowed from the fourth quarter's robust pace of 5.6 percent, analysts believe the recovery is strong enough to absorb a moderate blow from the European sovereign debt crisis sparked by Greece's deteriorating finances. There are worries that austerity measures being adopted by some European countries to cut huge budget deficits could slow growth in the region and hurt the global economy.

 

The president of the St. Louis Federal Reserve Bank, James Bullard, also played down the risk to the U.S. economy stemming from Europe. "Right now, I think the U.S. is going to be a beneficiary of the crisis in Europe, barring any contagion, and I'm arguing that I don't see how the contagion could occur," Bullard told reporters in Stockholm.

 

Output in the first three months of the year was pared back as business spending rose at only a 3.1 percent rate instead of the 4.1 percent initially reported last month. Spending grew at a 5.3 percent pace in the fourth quarter.

 

Business spending on software and equipment increased at a 12.7 percent rate rather than 13.4 percent. The GDP report also showed growth in after-tax corporate profits slowed to 2.1 percent in the first quarter after rising 6.5 percent in the prior quarter.

 

Consumer spending, which is key to the economy's recovery, was slightly revised down to a 3.5 percent rate from the 3.6 percent pace reported last month. This reflected modest growth in service-sector consumption, which offset a sturdy rise in purchases of durable goods.

 

Spending was still more than double the 1.6 percent pace in the fourth quarter and was the largest advance since the first quarter of 2007.

 

Consumer spending, which normally accounts for roughly 70 percent of U.S. economic activity, added 2.42 percentage points to GDP last quarter, the largest contribution since the first quarter of 2007.

 

Recovery from the longest and deepest recession since the Great Depression had so far been largely driven by manufacturing as businesses replenished their warehouses. Consumers, however, are now participating as the labor market begins to firm.

 

In the first quarter, businesses stepped up the accumulation of goods. Business inventories rose $33.9 billion, revised from the $31.1 billion reported last month. It was the first increase since the first quarter of 2008. Inventories contributed 1.65 percentage points to GDP in the quarter.

 

The rebuilding of inventories from record low levels is boosting manufacturing, with activity in the nation's Midwest region rising at a healthy clip in April, a report from the Chicago Federal Reserve showed.

 

First-quarter growth was also held back by hard-hit state and local governments curbing spending at the steepest rate since 1981. A downturn in construction and spending on structures were also a drag on growth in the first quarter.

 

New home construction fell after expanding for two straight quarters. While the slowdown in export growth was not as sharp as initially estimated last month, it was overshadowed by a rise in imports. That left a trade deficit, which subtracted 0.66 percentage points from first-quarter economic growth.

 

Treasury Lobbying for Stronger Financial Reform

 

The Treasury's number two official vowed on Thursday to fight efforts to weaken the U.S. financial reform bill and said it should include the so-called "Volcker rule" which would separate banking from proprietary trading.

 

Deputy Treasury Secretary Neal Wolin also said U.S. Senate and House of Representatives conferees working to reconcile their versions of the bill should also oppose efforts to weaken a new consumer financial protection agency with more lenient lending rules for car dealers.

 

"As conferees begin the process of reconciling the remaining differences in the two bills, we will continue to fight for the strongest financial reform bill possible," Wolin said in a speech to the Financial Industry Regulatory Authority's annual conference here.

 

"And we will oppose any attempts by particular interests to use the conference process as an opportunity to weaken the final bill," he added.

 

Wolin's remarks did not directly address the Obama administration's view of a controversial plan to force banks to spin off their swaps trading desks to reduce risks in the financial system. Another Treasury official, assistant secretary Michael Barr on Wednesday said this was not a "core" provision and was subject to alterations.

 

He said the administration would work hard to include the Volcker rule provisions, which are aimed at reducing risks by prohibiting depository banks from trading for their own accounts. These also would limit the size of financial firms by limiting mergers that concentrate more than 10 percent of financial system liabilities into a single company.

 

He said the Obama administration -- which owns nearly 61 percent of General Motors Co and nearly 10 percent of Chrysler, does not want to interfere with car dealers' ability to sell cars by subjecting them to tougher consumer protection rules.

 

"But where car dealers act like banks or like other non-bank financial companies, they should be subject to the same consistent rules of the road," he added.