MarketView for May 30

Summary

All the major equity indexes chalked up nice gains on Thursday, rebounding from the previous session's losses, as the day’s economic data eased concerns the Federal Reserve would begin to gradually scale back its policy of stimulating growth. As a result, the S&P 500 is on track to end the month with a gain of about 3.6 percent, while the Dow Jones Industrial Average has already tracked a gain of 3.3 percent for the month while the Nasdaq is up 4.9 percent.

The equity markets have been volatile recently and closely tied to alternating views of the future of the Fed's loose monetary policy. Shares tumbled on Wednesday on concern the Fed would curb its bond-buying because of signs the economy was strengthening. Treasury yields rose to the highest in 13 months the same day, also influenced by concern about possible Fed tapering.

Data showed first-time claims for unemployment benefits unexpectedly rose in the latest week while the government's latest reading on first-quarter gross domestic product came in slightly below forecasts.

Accommodative monetary policies by central banks around the world have helped drive both the Dow and the S&P 500 to record highs. The S&P 500 is up more than 16 percent year to date.

Pending home sales rose 0.3 percent in April to the highest since April 2010.

In company news, Costco, the largest warehouse club chain, reported third-quarter earnings that beat expectations by a penny, though sales were below forecasts. Shares fell 0.9 percent to $111.88.

Semiconductors were higher after chipmaker Avago Technologies forecast current-quarter revenue largely above expectations. Avago shares ended the day up 9.8 percent to close at $37.82.

NV Energy chalked up a gain of 22.5 percent to end the day at $23.62 after a unit of Berkshire Hathaway agreed to acquire the electric utility for $5.6 billion. Berkshire class B shares rose 1.6 percent to $114.84.

Shares of EMC rose 5.4 percent to end the day at $24.93 after instituting a quarterly dividend and increasing its stock buyback program to $6 billion from $1 billion.

Approximately 6.5 billion shares changed hands on the three major equity exchanges, a number that was slightly above the average daily closing volume of about 6.4 billion shares.

Unemployment Claims Up Slightly

The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but not enough to suggest a shift in the recent pattern of modest job gains. The Labor Department reported on Thursday morning that Initial claims for state unemployment benefits increased by 10,000 claims to a seasonally adjusted 354,000 claims. Claims for the prior week were revised to show 4,000 more applications received than previously reported.

A Labor Department analyst said claims for five states, including Virginia, Minnesota and Oregon, were estimated since state offices had less time to prepare data because of the national holiday on Monday. This could have the distorted the readings, making last week's claims a less useful gauge of labor market trends.

The four-week moving average for new claims, which irons out week-to-week volatility, edged up by 6,750 claims to 347,250 claims.

Despite the rise last week, claims remained in the middle of their range for this year and below levels economists normally associate with modest job gains. In addition, there is still no sign of layoffs related to belt-tightening in Washington, particularly the $85 billion in across-the-board government spending cuts which has slowed factory production.

Steady improvement in labor market conditions and rising house prices are helping to sustain consumer spending, limiting the impact of the drag from fiscal policy on the economy.

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid rose 63,000 to 2.99 million in the week ended May 18. The so-called continuing claims covered the week of the government's household employment survey from which the unemployment rate is calculated.

Continuing claims have dropped by 21,000 claims between the April and May household survey week, which could see the jobless rate holding at an almost 4-1/2 year low of 7.5 percent.

GDP Revised Downward

A drop in government spending dragged more on the economy than initially thought in the first three months of the year, a sign of increasing pain from Washington's austerity drive.

The economy expanded at a 2.4 percent annual rate during the period, down a tenth of a point from an initial estimate, according to revised figures from the Commerce Department released on Thursday.

Growth was held back as government spending fell across all levels of government and as businesses outside the farm sector stocked their shelves at a slower pace. Washington has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in January and slashing the federal budget in March.

Still, economic growth has been surprisingly resilient, supported by the Federal Reserve's low interest rate policies. Most economists expect growth will slow mid-year as budget cuts come into effect.

Government spending fell even more sharply in the fourth quarter, and economists speculate that government agencies pulled back in anticipation of budget cuts initially due to begin in January but which took effect in March.

In the first quarter, government spending fell at a 4.9 percent annual rate, faster than the 4.1 percent rate initially estimated. Spending fell at federal, state and local government offices, though the majority of the downward revision in Thursday' report came at the county and city level.

The drag from government and inventories was partially offset by an upward revision to consumer spending, which rose at a 3.4 percent annual rate, up two tenths of a point from the government's previous estimate.

However, a cloud hung over that category, as most of the upward revision was due to higher sales of gasoline. Higher prices at the pump are a burden on consumers, leaving them less money to spend on other things. Consumer spending accounts for more than two-thirds of all economic activity. After-tax corporate profits fell at a 1.9 percent annual rate in the quarter, the first decline in a year.

Total imports grew at a slower pace in the first quarter than initially estimated, moderating the drag on growth from net trade. Excluding the volatile inventories component, GDP rose at an upwardly revised 1.8 percent rate.

Costco Beats

Costco's fiscal third-quarter net income climbed 19 percent, bolstered by increased sales and more money from membership fees. For the three months ended May 12, the wholesale club operator earned $459 million, or $1.04 per share. That is up from $386 million, or 88 cents per share posted a year earlier.

Revenue rose 8 percent to $24.08 billion from $22.32 billion. Revenue from membership fees, which account for much of Costco's profit, increased to $531 million from $475 million. Revenue from stores open at least a year, a key gauge of a retailer's health, climbed 5 percent. This figure excludes results from stores recently opened or closed.

In the U.S., the metric increased 6 percent. It rose 4 percent overseas. If you exclude changes in gas prices and foreign exchange rates, revenue at stores open at least a year increased 7 percent.

Costco currently has 627 warehouses, including 449 in the U.S. and Puerto Rico, 85 in Canada, 33 in Mexico, 24 in the U.K., 15 in Japan, nine in Taiwan, nine in Korea and three in Australia.