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Proprietary Trading Weekly Market Recap For Friday, May 16, 2014

|Includes:FB, GMCR, SPDR S&P 500 Trust ETF (SPY)

Yields Tumble As Risk Aversion Increases

Risk aversion was the theme in the capital markets during the past week, and US yields pushed lower as investors scrambled to gain exposure. Economic data released during the week was mixed, but the short covering squeeze in the bond markets generated significant attention. Hedge fund titan David Tepper told investors that he would be cautious in US equities that contributed to the fall in stocks on Thursday. For the week, the S&P 500 index was nearly unchanged down less than 1 point.

There was a deluge of US economic data this week, which started with Retail Sales on Tuesday, which disappointed investors. Advanced retail sales increased by 0.1% month over month compared to the 0.6% expected by economists. Many believe that sales would increase during the spring after a rough winter but the rebound did not occur.

Inflation at the intermediate level also increased rapidly. U.S. producer prices posted their largest increase in 1-1/2 years in April as the cost of food and trade services surged, hinting at some inflation pressures. The Labor Department said that producer price index for final demand rose 0.6 percent, the biggest gain since September 2012. Economists polled had forecast prices received by the nation's farms, factories and refineries rising 0.2 percent.

U.S. CPI rose 0.3% m/m in April, which was in line with expectations after the 0.2% gain in March. CPI accelerated to a 2.0% y/y rate in April from 1.5% in March. Core CPI grew 0.2% m/m in April, firmer than projected after the 0.2% gain in March. Core CPI accelerated to a 1.8% y/y rate in April from 1.7% y/y in March.

Manufacturing in the US was mixed. The U.S. Empire State Index rebounded to 19.0 in May compared to the median of 5.3 after an unexpected April decline to 1.3. Most of the component data was strong as well. The employment index rose to 20.9 from 8.2. The new orders index rose to 10.4 from 2.8. The six-month business conditions index rose to 44.0 from 38.2.

The 0.6% April U.S. industrial production drop capped a slightly-revised two-month surge that left gains of 0.9% in March and 1.1% in February, with an April drop that was led by a 5.3% utility plunge from a March all-time high, alongside smaller give-backs of prior strength for manufacturing and business equipment.

The Philly Fed survey in May downtick to 15.4 trimmed the April pop to a 16.6 seven-month high from 9.0 in March and a -6.3 fifteen-month low in February. The ISM-adjusted measure similarly slipped to 52.5, after climbing to 52.8 in April from 50.4 in March and 49.0 in February.

On the employment front, U.S. initial jobless claims dropped 24k to 297k in the week ended May 10 from 321k in the April 26 week. The 4-week moving average fell 2k to 323.25k. Continuing claims fell 9k to 2,667k in the week ended May 3 from a revised 2,761k.

On Friday, market participants received robust housing start news. The big April U.S. housing starts and permits bounce left a solid post-winter rebound that should trim fears about a stalled recovery for housing. U.S. housing starts rose 13.2% to a 1072k unit pace in April, better than expected after rising 2.0% to a revised 947k rate in March.

Market participants will continue to closely watch treasury yields. If yields are able to convincingly move through the 2.5% level, it could lead to a protracted correction in stocks.

Stocks: SPY, FB, GMCR